In the 2016 Autumn Statement, the UK government confirmed, as previously announced, that from April 2017, it is to cap the amount of tax deductions for interest to the higher of 30% of taxable earnings in the UK or the net interest to earnings ratio for the worldwide group. This is subject to a threshold of £2 million net interest expense and a specific exemption for public benefit infrastructure (which may be more generous than previously indicated). See our previous update.

The implementation of these proposed restrictions is bad news for both lenders and borrowers. Particularly for those operating in highly leveraged industries such as the private equity and real estate markets. It will both increase the cost of borrowing and affect the terms on which lenders are willing to advance debt.

This announcement offers some hope as regards the public benefit infrastructure exemption, in that this is to be "widened". However, no detail is given and it is unlikely that this would benefit real estate finance or projects generally.

As expected, there was no mention in the statement of any grandfathering or transitional rules. These restrictions will apply to both existing and new loans. People had been hoping that the changes would be softened and delayed given the European Union has announced a more generous version of the same rules for 2019 (two years later) but the UK government has ignored those concerns.

The announcement also confirmed that banking and insurance groups are to be subject to the rules in the same way as groups in other industry sectors. No-one has worked out how they can actually be applied to these sectors in practice (including the OECD who are behind all of this) so there could be unforeseen consequences and teething issues across the banking and insurance industries from the UK being the early adopters of these changes next year.

Following the statement, it remains unclear whether the new restrictions will, on implementation, apply just to companies subject to UK corporation tax or also to companies subject to UK income tax (eg non-UK resident landlords). However, the statement also refers to a consultation at Budget 2017 on bringing non-UK resident companies receiving taxable income into the UK corporation tax regime. If adopted, such non-UK resident taxpaying companies mainly being non-UK resident landlords would also be subject to these new restrictions.