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HMRC internal manual

Guidance on Real Estate Investment Trusts

Conditions and Tests: Distribution Condition: general

This is the third condition of the Tax-exempt business Conditions in section 107 FA 2006.

90% distribution requirement

The company must distribute as property income dividends 90% of the income of its property rental business for the profits of the business to be exempt from tax. There is no requirement for the company to distribute any gains on disposal of properties that are part of that business.

The ‘property rental business’ comprises the activities of the company as defined in section 104, which is the company’s UK property rental and overseas property business to the extent income is not excluded by Schedule 16 (see GREIT01020).

‘Profits’ is the income of the property rental business, as computed under section 120 FA 2006.

The 90% distribution requirement must be met in respect of each accounting period of the company, and must be met by the filing date for the CTSA return for that accounting period.

Failing the Distribution Condition

In some circumstances, the company may distribute less than 90% of the tax-exempt profits and suffer no penalties. These fall into three categories:

  • legal impediment to distribution (see GREIT02055),
  • finally agreed measure of tax-exempt profits is higher than the amount returned and Regulation 6 of the UK-REIT (Breach of Conditions) (SI 2006/2864) regulations is relied on (see GREIT07045), and
  • sufficient distributions are declared but not paid out to certain shareholders as a result of reasonable steps taken in connection with the 10% rule (see GREIT02125).

Group REITs

The Distribution Condition applies to the principal company of the group which has to distribute 90% of the income of the Group’s UK property rental business as measured for tax purposes. There are no distribution requirements for subsidiaries. For more detail on how the Distribution Condition is modified by paragraph 6(4) Schedule 17 for Group REITs, see GREIT12025.