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HMRC internal manual

Guidance on Real Estate Investment Trusts

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HM Revenue & Customs
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Distributions: attribution rules: category (b) - income from taxable activities: examples

Facts for examples 2 and 3

C becomes a UK-REIT on 1 January 2007, has no distributable reserves brought forwardonce it has paid out the final distribution for 2006 (which was all paid as a non-PID).For the accounting period ending 31 December 2007, the income of its tax-exempt businessis 1,000, and is the same as the accounting measure of profit. The gains as measured forTCGA purposes and accounting profits on disposals of properties involved in the tax-exemptbusiness are both 100. Taxable income from other activities is 130 and chargeable gainsfrom other non tax-exempt activities are 70. The company’s income accrues evenly overthe year. Distributable reserves in respect of 2007 are 1,300.

C does not pay an interim distribution for first half 2007 and in March 2008, declares afinal distribution in respect of 2007 of 950. C does not pay any further distributions in2008 and chooses not to attribute any of the March 2008 dividend to 2008 profits. Category(a) is 90% of 1,000 = 900, is a PID and is payable under deduction of basic rate tax (seeExample 1(1) at GREIT08023).

Example 2

C then has three choices.

  1. C may want to maximise the non-PID dividend, so attributes all the excess over the 900 Category (a) to being a normal company dividend payable out of income from taxable activities. This balance of 50 is therefore payable gross. The 350 distributable reserves to carry forward will be made up of (b) 80 from taxable income, (c) 100 income from the tax-exempt business, (d) 100 gains from the tax-exempt business, and (e) 70 other reserves.
     
  2. C may decide it is easier administratively to pay out all the distribution under deduction of tax. C therefore attributes none to Category (b). See Example 4(1) at GREIT08030 for what happens to the balance.
     
  3. C may decide to split the balance 30 attributable to taxable income and 20 to income of the tax-exempt business. 30 is therefore paid gross as a normal company dividend. See Example 4(2) at GREIT08030 for what happens to the balance.

Example 3

C has no distributable reserves brought forward. In accounting period ending 31December 2007, the income of its tax-exempt business is 1,000 but the accounting measureof the income is 1,200 (the difference being the excess of capital allowances overdeprecation for the period). Taxable income from other activities is 130. Distributablereserves are 1,330. C decides to distribute 1,210 in March 2008.

Category (a) is 90% of 1,000 = 900, is a PID payable under deduction of basic rate tax(other than for gross payment cases – see GREIT08125).

As in Example 2(1), C wants to maximise the non-PID dividend. The balance of 310 istherefore attributable in full to (b), which in this case is made up of 130 from othertaxable activities plus 180 of the 200 difference between the accounting and tax measuresof the income of the tax-exempt business.

The 120 distributable reserves to carry forward will be made up of (c) 100 income from thetax-exempt business and 20 that will be available for Category (b) attribution in futureperiods as ‘taxable income’.