IFM22145 - Real Estate Investment Trust : Conditions and Tests: maximum shareholding: reasonable steps: distributions paid in respect of excessive shareholdings: CTA2010/S551(1)(b)

If the company, (principal company in the case of a Group REIT) , has taken reasonable steps to prevent paying a dividend to a holder of excessive rights (HoER), then some or all of the additional charge will not be imposed. HMRC has provided criteria which, if met, may be accepted as reasonable steps.(IFM22125)

The fourth criterion for arrangements to be reasonable is that the company, (principal company in the case of a Group REIT), has a mechanism in place to deal with distributions that are in fact paid in respect of an excessive shareholding but are being withheld pending action by the shareholder. This might happen if the company has not been notified that a shareholding is excessive. These arrangements must be designed to prevent the holder of excessive rights (HoER) becoming beneficially entitled to the distribution – which would also prevent a HoER from making a treaty claim in relation to the tax deducted on payment (since beneficial entitlement is a necessary condition of treaty claims).

The same mechanism could also be used if the company has reason to believe a shareholding had become excessive but were awaiting information to prove the point one way or the other, or where it appeared to them that a certificate to say that rights to distributions had been transferred was not valid.

One way to achieve this is for the company to put in place trust arrangements where the excessive shareholder does not dispose of their rights to distributions as described below.

Trust arrangements for retaining dividends

The Articles of Association could provide that distributions paid on shares forming part of an excessive shareholding were to be held on trust for any person (not themselves a holder of excessive rights (HoER)) nominated by the shareholder to which the distribution had been paid. This could include the purchasers of the shares if the HoER is in the process of selling down their holding so as not to cause the company to breach the 10% rule. There would also need to be default arrangements where no nomination was held, for example in favour of the company.

It is possible that the recipient of the distribution may not know that the shares in respect of which the distribution was paid were part of an excessive shareholding and may pass it on to some other person (for example if the shareholder is a nominee with no knowledge of the total interests of the underlying holder). It would be acceptable for the Articles of Association to provide that in these circumstances the shareholder should have no liability for having passed on the distribution. The ultimate recipient, if a HoER, is likely to receive the distribution as constructive trustee, subject to the trust set out in the Articles, so the objective set out above would still be satisfied.