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HMRC internal manual

Guidance on Real Estate Investment Trusts

Conditions and tests: maximum shareholding

BackgroundOne aim of the UK-REIT rules is move the point of taxation of income from property from the vehicle that owns the property to the person who has invested in the vehicle. To achieve this, it is necessary for UK tax to be chargeable on the dividends paid by the vehicle out of its tax- free profits.

Under many of the DTAs that the UK has with other states, the UK gives up some or all of its rights to tax dividends paid by UK companies. This allows residents of those states to reclaim in whole or in part any tax deducted at source from UK dividends, typically where they own 10% or more of the paying company. This ability to reclaim tax deducted at source combined with exemption from UK tax of the underlying income poses a significant risk to the Exchequer.

This risk is countered by regulations made under section 114 FA 2006 (SI 2006/2864) that may impose an additional tax charge on a company that is a UK-REIT (or principal company of a Group REIT) if they pay dividends to a company with a 10% or more interest in the UK-REIT company or its dividends, without having taken reasonable steps to avoid that happening.

A company which has sufficient interest in the UK-REIT company is referred to in the regulations as a ‘holder of excessive rights’ (HoER). This guidance (but not the legislation) uses the term ‘excessive shareholding’ to refer to the UK-REIT shares that give rise to a company holding excessive rights, and refers to a dividend payable to, or in respect of, such a shareholding, as an ‘excessive dividend’.