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HMRC internal manual

Guidance on Real Estate Investment Trusts

Conditions and Tests: Distribution Condition: legal impediment

If the company is prevented by law from distributing 90% of its tax-exempt income, then the condition is regarded as having been met if the company distributes as much as it legally can (section 107(9) FA 2006).


A legal impediment for this purpose is something contained in primary or secondary legislation, such as the UK Companies Acts, which prevents a company from making a distribution if its distributable reserves as set out in the accounts are insufficient. This could happen if the tax-exempt income of an accounting period exceeds the distributable reserves as measured for Companies Act purposes as a result of the disposal at a loss of a property.

For example, the tax-exempt income of company C (a UK-REIT) is 100, but its distributable reserves are only 75. C is therefore prevented by law from distributing 25. The normal distribution requirement would be for C to distribute 90% of 100 = 90, so the condition is satisfied if C distributes 75.

If however, the distributable reserves are 91, C must still distribute 90 to meet the Distribution Condition.

A provision in the Memorandum & Articles of Association of a company that puts limits on distributions might be a legal contract between the shareholders and the company but it would not count as a legal impediment that prevented a company distributing sufficient reserves to meet the distribution requirement. In that case, the company would have to pay an additional amount of tax in respect of the shortfall.

Applicable law

For the legal impediment ‘let-out’, law means UK law (including Northern Ireland legislation and Acts of the Scottish Parliament) (section 107(9)(a)(i) FA 2006). There are however powers to allow laws of other countries to be added by regulation. No regulations have been made under this power.

Group REITs

The legal impediment ‘let-out’ applies to the principal company of the group, and is extended to allow for legal impediments affecting subsidiaries – see GREIT12030 for more detail.