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HMRC internal manual

Guidance on Real Estate Investment Trusts

From
HM Revenue & Customs
Updated
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Distributions: general

One of the effects of the UK-REIT regime is that it moves the point of taxation from the vehicle to the investor, so far as profits of the property rental business are concerned. It does this by exempting the profits (income and gains) of the property rental business from tax, and then taxing the distributions of those profits when they are returned to investors as dividends.

The distributions that are paid out of the tax-exempt profits are payable under deduction of income tax at the basic rate. They do not carry 1/9th tax credits, as provided in section 231 ICTA and section 397 ITTOIA for normal company dividends.

Property Income Distributions (PIDs)

Distributions that are paid out of the tax-exempt profits are referred to in the guidance (but not in the legislation) as property income distributions or PID. For these purposes, tax-exempt profits are profits of the tax-exempt business as calculated for tax purposes. A PID can include distributions of capital gains on disposals of assets involved in the property rental business as well as the tax-exempt income (i.e. Categories (a), (c) or (d) in section 123 FA 2006 - see GREIT08010).

The PID can be paid in respect of preference shares or ordinary shares.

In the hands of investors, PIDs are generally taxable as income from a property business. Credit is given for the amount of income tax deducted from the PID against tax due on them. If no tax is payable, the tax deducted on payment is generally repayable.

More detail on the taxation of PIDs in the hands of shareholders can be found at GREIT08500 onwards.

For a Group REIT, only the principal company can pay out PIDs.

Other dividends and distributions (non-PID dividends)

A UK-REIT may also carry out activities that give rise to taxable profits and gains. Distributions out of profits that are within the charge to tax are treated in the same way as normal company dividends. Note that this also includes book-tax adjustments between accounting profits of the tax-exempt business and the tax measure of those profits.

Non-PID dividends are those attributed to Categories (b) and (e) in section 123 FA 2006 - see GREIT08010).

The company pays these out and handles the non-PID dividends administratively in exactly the same way as normal company dividends. Again, the non-PID dividend can be in respect of preference shares or ordinary shares.

For a Group REIT, all the dividends and any other kind of payment made by a subsidiary company that comes within the definition of distribution as used in Part VI ICTA are treated in the same way as distributions made by normal companies.

For shareholders within the charge to CT, these non-PID dividends are generally exempt from CT under Part 9A CTA 2009. For income tax payers, the non-PID dividends carry a 1/9t h non-repayable tax credit in the normal way, and they are taxable as savings income in the same way as normal dividends from a UK company (see GREIT08500 onwards for detail).