The government has tabled an amendment to UK REIT legislation to prevent large property firms being penalised for repaying debt early.

The amendment, which was one of the crisis-related REIT measures lobbied for by the British Property Federation in the run up to the Budget 2009, is included in the chancellor’s Finance Bill.

If the amendment is passed it will mitigate the impact of the gearing restriction in cases where a REIT is suffering financial hardship and breaches the restriction for reasons outside its control.

The change related to a penalty that firms would receive if they breached a ratio of profits to financing costs of 1.25:1.

The government has introduced discretion for the HM Revenue to waive the tax charge in cases where the company was in “severe financial difficulties” and the firm could not reasonably have taken action to avoid breaching the ratio.

The BPF said that for example if a firm’s interest rates rise and rents fall REITS could be left breaching the ratio even though if they had not over-borrowed.

‘Similarly, by renegotiating financing deals they could incur extra financial costs. For example, paying off a loan early could incur a charge which may break the above ratio ruling. This is a similarly unfair penalty that falls outside the aims of the ruling,’ it said.

The charge would have been corporation tax of 28% paid on the excess financing charges.

Peter Cosmetatos, director for finance at the BPF, said: ‘We argued that the restriction should not give rise to a tax charge other than in cases where a REIT had taken on excessive debt or its investors use debt to extract their return, reducing the property distributions on which the Revenue collects withholding tax. This a welcome change that shows officials have listened to common sense.’

The BPF had briefed David Gauke MP, from the Tories' shadow Treasury team. He caused it to be debated at the Committee stage of the Bill's passage through Parliament, and the Tories tabled that amendment and three others that the BPF had put forward last Thursday. The Government has now tabled its own amendment, which should become part of the Finance Bill at the Report stage next week.

Phil Nicklin real estate tax partner at Deloitte, said: ‘The REIT interest cover ratio was conceived in a property boom and is not necessarily appropriate in a crash.

‘REITs that renegotiate their debt are having to pay penal rates of interest, which might mean they exceed the interest cover ratio. To add insult to injury, they have to pay a tax penalty on that excess which could cause financial hardship the proposed relaxation is most welcome.’