The UK property industry is calling on government to rethink legislation on tax relief for interest costs set to be introduced as part of the 2017 Finance Bill in March, as it will “disproportionately and unnecessarily” punish the sector and put at risk as much as £20bn of development financing in the market.Discussion on these measures began in late 2015 following recommendations made by the OECD aimed at clamping down on much publicised tax avoidance by certain global corporates. The latest round of consultation ends this Thursday and the new rules will apply from 1st April.The new rules aim to limit tax deductions for interest expense and other similar financing costs. In particular they restrict the ability of large international businesses to reduce their taxable profits through excessive borrowing in the UK and form part of the government’s wider changes to encourage alignment of the location of taxable profits with the location of economic activity. They are consistent with the UK’s more territorial approach to corporate taxation.The BPF is broadly sympathetic towards the government’s drive to ensure profits in the UK are taxed equitably.However the property industry has lobbied strongly to prevent real estate unfairly becoming what BPF director of policy Ion Fletcher describes as “collateral damage” from legislation aimed at preventing “Base Erosion and Profit Shifting” (BEPS), or tax avoidance strategies used by multinational companies to move profits from jurisdictions that have high taxes (such as the United States and many Western European countries) to jurisdictions that have low (or no) taxes.The industry has pointed out that it is very hard for real estate debt finance to be used for tax avoidance, as real estate income is always taxed in the country where it is located. Instead, as a highly capital-intensive industry, real estate simply relies on debt finance more than most other sectors.Following consultation the government last month published a number of exemptions aimed at addressing some of these concerns.The industry has welcomed a new so-called “Public Benefit Infrastructure Exemption (PBIE)” which aims to exempt property let to a third party from the new rules. This shows the government recognises that real estate is a highly geared sector that uses debt because it needs to rather than for tax avoidance.However, the industry is concerned that the exemption - which takes in both real estate and infrastructure – includes onerous criteria that in practice will make it very difficult to claim.In particular the industry is concerned by strict legislation exempting the use of parent company guarantees which effectively means that the proposed exemption does not accommodate most debt secured against real estate developments across the UK.The problem occurs because most lenders to development projects require completion or cost over-run guarantees underwritten by a parent company to mitigate the heightened risk.Based on the most recent De Montfort Survey the BPF says there is over £20bn of development finance at risk of suffering a restriction in tax relief under the rules, something that could clearly strangle development at a critical time for the industry and economy.The BPF is urging government to reconsider draft legislation it says has not taken proper account of how real estate companies use debt.It argues that the criteria around parent company guarantees must be revised to be proportionate to the risk to the exchequer and argues that any new rules should only be imposed only on new loan arrangements, to avoid borrowers having to renegotiate terms on existing debt facilities.Ion Fletcher said: “The property industry is extremely worried about this legislation which will disproportionately punish real estate when it is very much not the government’s intended target.”Peter Cosmetatos, chief executive officer, CREFC Europe, said: "Development finance is one of the areas of UK CRE finance that has made a rather imperfect recovery since the depths of the financial crisis (another is small ticket loans). Banks have remained relatively cautious (in part perhaps put off by higher regulatory capital costs as well as greater sensitivity to risk generally). Non-bank lenders have been much more enthusiastic, but in volume terms they start from a low base."Given that property development is good for the economy as a whole (we aren’t facing over-supply risks) and that it presents very low BEPS risk, it is worrying that the government’s proposals threaten to make it even more difficult. An additional problem is that the speed with which these proposals are being rushed into law has left many lenders behind: my sense is that few lending firms have really got to grips with how their lending practices should change to accommodate these complicated interest deductibility restrictions."