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HMRC internal manual

Guidance on Real Estate Investment Trusts

Conditions and Tests: maximum shareholding: reasonable steps: retained dividends: interaction with other rules

90% distribution requirement

A company may withhold payment of some or all of dividend as a result of reasonablesteps taken to avoid a charge under section 114 FA 2006 (as imposed by regulation 10 SI2006/2864).

If so, the amount withheld is treated as having being paid for the purposes of meeting thedistribution requirement (section 107(9)(b) FA 2006). This means that the distributionrequirement is met by reference to the amount of dividend declared, even if there aredelays in paying some of it to beneficial owners because of the 10% shareholding rule.

Requirement to account for tax on property income distributions

The regulations in SI 2006/2867 that apply to the deduction and accounting to HMRC oftax from payments of distributions out of the profits of the tax-exempt business applyequally to dividends that are withheld (section 122(4) FA 2006). Other than where thedividend is paid to the types of person listed in regulation 7(4) (a trustee of aregistered pension scheme or the manager of an ISA, PEP or CTF), the requirement to deductis by reference to the nature of the person beneficially entitled to the dividend.

As the company is unlikely to know who will eventually be beneficially entitled to thedividend when it can be released, the company should deduct tax on payment of retaineddividends into trust, and account to HMRC for the tax in the normal way. When the dividendcan be released, and the beneficial recipient is entitled to gross payment, the companyshould submit a revised CT61(Z) for the return period when the dividend was originallypaid into trust to reflect this.

The date withheld amounts are treated as paid is the same date that applies to thedividends that are paid out to shareholders (i.e. when they due and payable – section834(3) ICTA).