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HMRC internal manual

Guidance on Real Estate Investment Trusts

Conditions and Tests: maximum shareholding: nature and amount of charge

Where the company has paid out a dividend to, or in respect of a holder of excessive rights in the company (HoER) (that is, one that breaches the 10% limit - see GREIT02100) a tax charge is imposed on the company. This is to make good any possible loss of tax that could arise if the recipient were able to reclaim under a double tax treaty all or a substantial part of the tax deducted at source from the dividend.

Nature of the charge (regulation 10(3) to (5) SI 2006/2864)

The notional income is deemed to be other taxable under s979 CTA 2009 income arising to C (residual). It is chargeable to tax at the main CT rate. The charge does not appear in the table in section 1016 ITA 2007 so it cannot be reduced by losses from other sources. Neither can it be reduced by any other losses, group relief, allowances or deficits (regulation 10(5) SI 2006/2864).

For a Group REIT, the charge is on the residual part of the principal company. The charge is imposed by regulations made under section 114 FA 2006

Amount of the charge (regulation 10(2) SI 2006/2864)

The amount is worked out by reference to the dividend that is paid to the HoER. It is not restricted to the excess over 10%. For example if A owns 12% of the ordinary share capital (OSC) of company C (a UK-REIT) and B owns 24% of C’s OSC, the notional income in respect of B will be double that in respect of A (and not seven times as much).

The formula to calculate the notional income is two parts: one relates to dividends paid in respect of OSC; the other to dividends paid in respect of preference shares. It is explained in more detail in GREIT02123. The aim of the formula is to charge the company by reference to the percentage of the company’s dividend to which the HoER is beneficially entitled if that is lower than the percentage by reference to voting rights or shareholding. This is illustrated by an example in GREIT02123.