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HMRC internal manual

Guidance on Real Estate Investment Trusts

From
HM Revenue & Customs
Updated
, see all updates

Conditions and Tests: maximum shareholding: formula to work out notional income (regulation 10(2) SI 2006/2864)

The formula as set out in regulation 10(2) SI 2006/2864 is:

DO x SO x BRT + DP x SP x BRT  
       
MCT   MCT  

where:

  • DO is total amount of the profits of C (tax-exempt) distributed by the company in respect of its OSC
  • SO is the lesser of the percentage of rights

    • in respect of the company’s OSC held by the HoER, and
    • held by the recipient of the distribution

in respect of which a distribution is made.

  • BRT is basic rate of income tax in force when the distribution was made
  • MCT is main rate of CT applicable to the company (principal company in the case of Group REIT) (regulation 1(2) SI 2006/2864)
  • DP is total amount of profits of C (tax-exempt) distributed by the company in respect of its preference share capital, and
  • SP is the lesser of the percentage of rights

    • in respect of the company’s preference share capital held by the HoER, and
    • held by the recipient of the distribution.

in respect of which a distribution is made.

DO x SO is the amount of dividend on OSC paid to the excessive shareholder. Multiplying that by BRT calculates the amount of income tax that the company would deduct from that dividend. Dividing by MCT takes account of the fact that the notional income will be chargeable at MCT. This results in a tax charge of the amount of basic rate tax that could potentially be reclaimed in whole or in part under a DTA by the recipient of the dividend.

The second part of the formula makes the same calculation in respect of dividends paid on preference shares.

Example

Company C is a UK-REIT with 100,000 ordinary shares in issue and no preference shares. Its accounting date is 31 December. Basic rate for income tax is 20% and the main CT rate is 28%.

Company A owns 12,000 shares in C. C declares a dividend of 10p per share and pays it on 15 February 2010. A sells its rights to dividends on 4,000 of those shares to an individual and receives the dividend on the remaining 8,000.

A is a HoER because they control 12% of the voting rights and own 12% of the shares in C. A’s beneficial entitlement to dividends is to 8% (= 8,000/100,000).

DO is 10,000 (= 10p x 100,000). A’s beneficial entitlement to dividend is lower than the percentage of the other rights they hold in C, so SO is 8%.

The notional income arising to C (residual) in accounting period ending 31 December 2010 is therefore 10,000 x 8% x 20%/28% = 571.42. The amount of CT due is 160 (which is 20% of the 800 dividend payable to A).