The corporate interest restriction and the leveraged property company: the GBP 2 million line, and what a holding company does to it
A company that owns let property can deduct its interest in full, which is much of the case for holding property in a company at all. That stops being true above GBP 2 million of net interest a year. Here is how the corporate interest restriction works on a property portfolio, why rental profits give it so little room, the structural decision that can move a group across the line, and the two routes out that property groups most often use.
The limit companies do have
Individual landlords lost the deduction for residential finance costs in stages from 2017, and now receive only a basic rate tax reduction. Companies were left out of that restriction, and interest remains an ordinary deduction for them. They are not unrestricted, though. Since April 2017 Part 10 of the Taxation (International and Other Provisions) Act 2010 has capped the interest a company or group can deduct, broadly to 30 per cent of its taxable profits before interest, tax, capital allowances and certain reliefs, a figure the legislation calls tax-EBITDA. The cap only bites once net interest and financing costs exceed GBP 2 million in a twelve month period. At an interest rate of 5.75 per cent, that is borrowing of about GBP 35 million. A small portfolio will never reach it. A growing one, or several companies under common ownership, may reach it sooner than its owners expect.
Why a rental business has so little room under the cap
Thirty per cent of profits sounds generous until it is applied to property. A trading company typically earns a profit several times its interest bill. A leveraged rental company does not. Consider, as a rough illustration, a portfolio yielding 6 per cent gross, with running costs taking a sixth of that and borrowing at 65 per cent of value at 5.75 per cent. Profits before interest are about 5 per cent of the portfolio's value, so 30 per cent of them is about 1.5 per cent of value. The interest is about 3.7 per cent of value. On those figures a portfolio above the de minimis would have well over half of its interest restricted, and the only thing standing between most property companies and that result is the GBP 2 million floor. Tax-EBITDA is built from amounts taken into account for corporation tax, not from the accounts, so revaluation gains that appear in the accounts do not add to it.
How the restriction is measured
The cap works on the worldwide group, identified by the international accounting consolidation rules and led by an ultimate parent. A group's interest capacity for a period is the greater of its interest allowance and the GBP 2 million de minimis, with the allowance augmented by any unused allowance from the previous five years. If the group's aggregate net tax-interest expense exceeds that capacity, the excess is disallowed. The disallowed interest is not lost. It is carried forward indefinitely and can be reactivated in a later period in which the group has spare capacity. Unused allowance, by contrast, expires after five years. So the de minimis is not a threshold above which all interest is restricted. It is a floor under the capacity: a group with GBP 2.3 million of net interest and an allowance below GBP 2 million has GBP 300,000 disallowed, not GBP 2.3 million.
The structural point most owners miss
An individual cannot be an ultimate parent. HMRC's manual confirms that only a relevant entity can be, meaning a company, or an entity whose shares are listed and widely held. It follows that two companies owned directly by the same person, with no company above them, are two separate single-company worldwide groups, each with its own GBP 2 million de minimis. Put a holding company on top of them and they become one group, with one de minimis between them. That can be the right decision for other reasons, and holding company structures have genuine tax and commercial advantages. But it has a cost that rarely appears in the proposal, and it is a cost that arises only for groups whose borrowing sits near the line.
An illustrative group
Illustrative figures, not anyone's affairs. An individual owns two property companies directly. Company A has GBP 40 million of borrowing at 5.75 per cent, net interest of GBP 2.3 million, and tax-EBITDA of GBP 3 million, so its allowance at 30 per cent is GBP 900,000. Its capacity is the GBP 2 million de minimis, and GBP 300,000 of interest is disallowed, costing GBP 75,000 at the 25 per cent main rate this year, although the amount is carried forward. Company B has about GBP 26 million of borrowing, net interest of GBP 1.5 million and tax-EBITDA of GBP 2 million. It is below the de minimis and nothing is restricted. Now suppose the owner places both under a new holding company. The group's net interest is GBP 3.8 million, its tax-EBITDA GBP 5 million, and its allowance GBP 1.5 million. Its capacity is still only GBP 2 million, and GBP 1.8 million is disallowed, costing GBP 450,000 for the year instead of GBP 75,000. Nothing about the properties, the rents or the borrowing has changed.
The two routes out that property groups use
The first is the group ratio election. Instead of 30 per cent, the allowance is calculated using the ratio of the group's net interest owed to unrelated parties to its profit before interest, tax, depreciation and amortisation in the consolidated accounts, applied to the UK tax-EBITDA, and capped at the group's net interest owed to unrelated parties. For a group whose borrowing is all from third party lenders and whose accounts show modest profits against that borrowing, the ratio can be much higher than 30 per cent. It is made in the interest restriction return, so it needs a reporting company. The second is the public infrastructure exemption. A company whose income and assets relate, ignoring insignificant amounts, entirely to public infrastructure assets can elect to be a qualifying infrastructure company, and HMRC's manual treats buildings within a UK property business that are let on a short term basis, meaning an effective duration of less than 50 years, to unrelated parties as public infrastructure assets. The effect is that certain interest paid to unrelated parties is excluded from tax-interest expense. The election, once made, stays in effect for at least five years. Buildings let to a company in the same ownership do not qualify, which rules the exemption out for many owner-occupied arrangements.
The administration, and what changed in 2026
Groups subject to the restriction appoint a reporting company, which files an interest restriction return within 12 months of the end of the period. For periods of account ending on or after 31 March 2026 the gov.uk guidance says the reporting company must be appointed for each period, with no time limit for doing so, and the appointment must be authorised by more than half of the group's non-dormant companies. A return is now needed only where the group is allocating disallowed amounts to particular companies, carrying forward interest allowance, reactivating interest disallowed earlier, or making an election. Late returns attract penalties of GBP 500, or GBP 1,000 if more than three months late. One practical consequence deserves attention. The de minimis itself cannot be carried forward, and unused allowance exists only where it has been established through a return. A group growing towards the line, with a healthy allowance it is not yet using, should consider whether to put a reporting company and a return in place before it needs them.
Questions for the year before you cross the line
What is our net interest expense for each company, and which companies form a worldwide group with which others? Is any restructuring, such as a new holding company, a merger of two portfolios or a joint venture, about to bring companies together under one ultimate parent? What is our tax-EBITDA, and how much of the interest above GBP 2 million would the 30 per cent rule actually allow? Would the group ratio help, given our lenders and our consolidated accounts? Are our buildings let to unrelated parties on terms that could meet the infrastructure conditions? And are we building up unused allowance now that could shelter a disallowance later? The restriction is mechanical, and the numbers are easy to run in advance. They are much harder to change once a structure is in place.
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This article is general information only and does not constitute tax advice. Figures and dates are current as at the date of writing; any worked example is illustrative. Always consult a qualified adviser before acting.