Transfer Pricing recommendations for businesses investing in UK real estate

In the acquisition of UK real estate assets, particularly those involving cross-border group financing, thin capitalisation rules under UK transfer pricing legislation play a critical role. HMRC expects intra-group debt arrangements to reflect what would be agreed between independent parties.

This means that both the quantum of debt and the interest rate must be demonstrably at ’arm’s length’.

For accounting periods beginning on or after 1 January 2027, businesses that are subject to UK transfer pricing rules should consider the UK’s International Controlled Transactions Schedule (“ICTS”). The ICTS requires detailed transaction level disclosure of related party financing arrangements where either the opening or closing balance exceeds £50 million, or the in year P&L impact (including interest, FX and guarantee fees) exceed £1 million. Taxpayers will need to complete the ICTS with information on balances, pricing, terms and profit impacts, and must be submitted as part of the company’s UK corporation tax return.

Given the scale of many real estate transactions, these thresholds are likely to be exceeded. As such, a robust transfer pricing analysis and subsequent documentation is essential to support the terms and conditions applied to intra-group loans.

Key ratios and considerations

When assessing whether an intercompany debt structure meets arm’s length standards, it is imperative to consider a range of commercial and financial indicators at the time of acquisition. These include:

• Asset profile: The type of property (e.g., commercial vs residential), location, rental yield, and investment purpose (e.g., long-term hold vs. development).
• Leverage metrics: The overall quantum of debt, by reviewing market data on debt-to-equity (D/E), and loan-to-value (LTV) or loan-to-cost (LTC) ratios depending on the investment.
• Servicing capacity: The borrower’s ability to repay the principal, and meet interest payments, typically assessed through interest cover ratios based on projected EBITDA.
• Interest rate: Whether the rate charged reflects the borrower’s risk profile, asset characteristics, and prevailing market conditions.

If the interest expense on the intercompany debt is considered excessive compared to market data, then this will be a permanently disallowable expense and will need to be adjusted for accordingly in the tax return of the UK borrower.

Further, if there is any subsequent refinancing within the structure, then the analysis will need to be revisited.

Our recommendations

We recommend that businesses investing in UK real estate through intercompany financing take a proactive approach to thin capitalisation compliance. HMRC expects intra-group debt arrangements to mirror independent market conditions, which means careful planning and documentation are essential. Based on our experience, we recommend the following:

• Benchmark intercompany debt terms to market standards: Ensure the interest rate and debt quantum reflect what a third-party lender would offer, taking into account the borrower’s credit profile, asset type, and prevailing economic conditions.
• Design a robust transfer pricing policy: Tailor your financing strategy to the nature of the asset – whether it’s income-generating property, development land, or mixed-use real estate – while aligning with commercial and tax objectives.
• Prepare defensible documentation: Support your position with a comprehensive transfer pricing memo that addresses HMRC’s expectations, including analysis of debt capacity, interest coverage, and asset-specific risk factors.

Would you like to know more?

If you would like to discuss any of the above and how it impacts you, please speak to your usual Blick Rothenberg contact, or Susan Vincent using the form below.