Corporate Interest Restriction: Tax Relief on Development Finance for Property Groups

Interest is usually the single largest deductible cost in a geared property group's accounts — bank debt on a development, a bridging facility, shareholder loans that funded the deposit on an SPV's first site. Most developers assume that if the interest is genuinely paid to fund the business, it's simply deductible. For most, it is. But once a group's net interest expense crosses £2 million in a year, the Corporate Interest Restriction steps in and can disallow a real cost the company has actually incurred, purely because of how much of it there is relative to the group's profits.

What the rule actually does

The Corporate Interest Restriction (CIR), in place since April 2017, limits how much net interest expense a corporate group can deduct against Corporation Tax in a given period. It doesn't question whether the interest is a genuine business cost — it's a blunter mechanical cap based on the size of that interest relative to the group's profits, applied at group level rather than to each company individually.

Two things make this more relevant to property groups than most sectors realise. First, property development and investment is capital-intensive and commonly debt-funded, so interest costs run high relative to other sectors. Second, family-run property groups routinely use related-party debt — directors, shareholders or connected companies lending into an SPV — alongside bank finance, and that related-party interest counts toward the CIR calculation exactly the same as third-party bank interest does.

The £2 million de minimis

CIR only bites once a group's net interest expense — interest paid less interest received, aggregated across every UK company under common ownership — exceeds £2 million in a 12-month period. Below that figure, the restriction simply does not apply, however the debt is structured and however highly geared an individual company within the group might be.

The de minimis is deceptively easy to breach for a group that doesn't look large on paper. It's tested at worldwide group level, not per company, so a holding structure running several SPVs — each modestly geared on its own, in the pattern covered in our guide to when an SPV makes sense — can still tip over £2 million once every company's bank interest, shareholder loan interest and any intra-group interest is added together. A group that's never thought of itself as "large" for tax purposes can find itself well inside CIR territory purely because interest rates rose and its portfolio grew at the same time.

The fixed ratio method: the default cap

Where the de minimis is exceeded, the default calculation is the fixed ratio method: deductible net interest is capped at 30% of the group's aggregate UK tax-EBITDA (broadly, taxable profits before interest, tax, depreciation and amortisation are deducted, adjusted for tax purposes). Interest above that cap in a given period isn't deducted in that period.

It isn't necessarily lost forever, though. Two carry-forward mechanisms soften the blow:

• Disallowed interest can be carried forward indefinitely and deducted in a later period, once the group has spare interest capacity (because profits have grown or debt has reduced).
• Unused interest allowance — where a group's net interest is comfortably below its 30% cap in a given year — can be carried forward up to five years, giving some flexibility for groups whose interest costs and profits don't move in step year to year, which is common in development where profit is lumpy and tied to when a scheme completes and sells.

The group ratio method: the election that suits geared property groups

The fixed 30% ratio isn't always fair to a group that is legitimately, and unremarkably, highly geared — which describes a lot of property investment and development businesses funded predominantly by bank debt secured on the assets themselves. The group ratio method is an election that substitutes a different cap: the worldwide group's actual net interest to EBITDA ratio, taken from its consolidated accounts, applied instead of the flat 30%.

Where a group's real-world gearing, and the interest that comes with it, is higher than 30% of EBITDA but reflects genuine, arm's-length third-party borrowing rather than aggressive related-party loading, electing into the group ratio method can restore relief the fixed ratio method would otherwise deny. The election has to be made and the calculation prepared accurately — it isn't automatic, and getting the underlying financial statements aggregation right across a multi-SPV structure is where the practical work sits.

Where related-party debt changes the picture

Family and owner-managed property groups often fund acquisitions and development costs with a mix of bank debt and director or shareholder loans, partly because it's simpler than negotiating additional bank facilities for every new site. That related-party interest is entirely legitimate and, in isolation, deductible in the normal way — but it adds directly to the group's net interest expense for CIR purposes in exactly the same way bank interest does.

Two consequences follow. First, a group relying heavily on shareholder loans to fund growth can find itself crossing the £2 million de minimis sooner than a group of comparable size funded purely by bank debt, simply because there's more total interest in the numbers. Second, related-party loan interest sits alongside the wider question of how profit and value move between individuals and the company — the same territory covered in our guide to extracting profit from a property company — so the interest rate and terms on a director loan need to be commercially defensible in their own right, independent of the CIR calculation.

Reporting obligations

Where a group's net interest exceeds the de minimis, or where it wants to make elections such as the group ratio method, an Interest Restriction Return generally needs to be submitted to HMRC by a nominated reporting company, setting out the group's interest, EBITDA and any restriction or carry-forward figures for the period. Groups that stay comfortably under £2 million typically have no filing obligation under CIR at all, but the moment a group is close to the threshold, it's worth checking the calculation properly rather than assuming the position is safe.

What this means in practice for a growing group

Most single-SPV landlords and smaller developer groups will never see CIR bite — the £2 million de minimis is a real, meaningful threshold, not a token one. The point at which it matters is growth: a group refinancing multiple sites simultaneously, taking on a larger development facility, or adding shareholder-funded acquisitions on top of existing bank debt, can move from comfortably outside CIR to inside it within a single accounting period. Modelling the group's aggregate net interest position before committing to new debt, rather than after the interest has already started accruing, is the difference between planning for the restriction and being surprised by it at the tax return stage.

Common questions

What is the Corporate Interest Restriction?

A UK Corporation Tax rule that limits how much net interest expense a corporate group can deduct. Once net interest exceeds a £2 million de minimis, relief is capped at the higher of 30% of the group's UK tax-EBITDA under the fixed ratio method, or a proportion based on the worldwide group's actual borrowing under the group ratio method, with disallowed interest potentially carried forward.

Does CIR apply to small property companies?

Not usually. The £2 million de minimis applies to the whole group's net interest, not per company, so most single-SPV or small multi-property landlords sit well below it. It becomes relevant as a group's combined bank and related-party interest grows toward that figure.

How does the £2m de minimis work for property groups?

It's tested against the net interest expense of the entire worldwide group over a 12-month period, aggregating every UK company under common ownership. If total group net interest is £2 million or less, CIR does not restrict any deduction regardless of individual company gearing.

What's the difference between the fixed ratio and group ratio methods?

The fixed ratio method, the default, caps deductible net interest at 30% of the group's UK tax-EBITDA. The group ratio method is an election that instead uses the worldwide group's actual net interest to EBITDA ratio from its accounts, which can restore relief for groups that are legitimately highly geared with genuine third-party debt.

This article is general information, not personal tax advice, and tax rules change. Your own position depends on facts we cannot see from here — please take advice before acting on anything above.

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