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HMRC internal manual

Guidance on Real Estate Investment Trusts

Conditions and Tests: maximum shareholding: reasonable steps: preventing payment of a dividend to a holder of excessive rights

The second criterion for arrangements to be reasonable is that the company must be able to prohibit the payment of dividends on shares that form part of an excessive shareholding. It is the payment of a dividend in respect of an excessive holding that triggers a tax charge, not the existence of an excessive shareholding. To prohibit payment would require changes to the company’s Articles of Association.

Second suggested addition to the Articles of Association

This may take the form of a provision that provides that dividends will not be paid in the following circumstances:

  • on shares forming part of an excessive shareholding if the board is not satisfied that ownership of dividends has been disposed of (see below for how the board might be satisfied of this)
  • on shares where there has been a failure to provide information requested in order to determine if a shareholding is excessive (see GREIT02145)
  • in any other case, if the board believes the shares may form part of an excessive shareholding.

A company may not withhold payment of dividends permanently, so the company needs to have arrangements for when the withheld dividends can be released. This needs to be documented and the company needs to be able to show that it will not operate discretion in releasing dividends without all the criteria for release being met. Discussion on how the dividends are looked after until one of these events happens is at GREIT02145.

Dividends withheld may be released and paid if the payment would not be to a HoER.

Events that could trigger release include:

  • the shareholder provides a certificate of non-ownership of the dividends for certification requirements, see (GREIT02140
  • the shareholder provides information required to show the shareholding is not part of an excessive shareholding (see GREIT02140)
  • when shares are transferred in such a way that the right to the retained dividends is transferred, on transfer to a person who certifies that they are not a HoER (and is not holding them on behalf of someone who is)
  • on transfer of sufficient shares from a holding so the remaining shares held are no longer part of an excessive holding, provided the right to the dividends on the transferred shares is also transferred (the release here is of dividends withheld on the retained shares).

Before releasing the dividends where shares have been transferred, the company would need some form of certification by the excessive shareholder that the rights to the dividends have been transferred. This certificate and the one covering non-ownership of the dividends must also cover the fact that the new owners do not trigger the 10% rule as a result of acquiring the right to the dividends or the excess shares.

A company would need to document the evidence that a trigger for release of the dividend has occurred in order to show that the payment was made in appropriate circumstances. For detail on how the dividends are dealt with until one of the events happen see GREIT02145.