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HMRC internal manual

Guidance on Real Estate Investment Trusts

HM Revenue & Customs
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Conditions and Tests: Distribution Condition: interaction with 10% maximum shareholding rule

In some circumstances, the company may withhold payment of some of the declared dividend as a result of reasonable steps taken to avoid or reduce a tax charge under section 114 FA 2006 (the 10% Rule). These steps may include provisions in the Memorandum and Articles of Association (M&A) that allow the company to withhold paying a dividend to, or in respect of, certain shareholders with an interest of 10% or more in the company (a holder of excessive rights in the company – HoER).

Where the company has such a provision in its M&A, and does in fact withhold payment to, or in respect of an excessive shareholding, the company is regarded as having met the Distribution Condition if it would have done otherwise.

ExampleCompany C (a UK-REIT) has 100 shares, with one shareholder SH Limited owning 20 shares at the dividend date. The tax-exempt income of accounting period ending 31 Dec 2008 is 1,000, and C declares a dividend of 9.5 per share. Under its M&A, C can retain dividends payable in respect of a substantial shareholding until the shareholder has reduced their holding to below 10%.

At 31 Dec 2009, SH Limited still has 20 shares, so by the time limit (the CTSA filing date for the accounting period in question), C has distributed 760 and retained 190. Although the amount paid out is less than 900 (the 90% minimum normally required), the company is not penalised.

If SH Limited sells 15 shares on 30 Sep 2009 but C delays paying out the retained dividends until 15 Jan 2010, C will incur a tax charge based on notional income of 900 – 760 = 140. This is because at the time limit, the dividend is withheld because C has not got round to paying it out and not because section 114 applies.

Group REITs The same rules and consequences follow where the principal company of a Group REIT withholds dividends to avoid or reduce a tax charge under section 114.