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HMRC internal manual

Guidance on Real Estate Investment Trusts

Distributions: attribution rules: category (d) - gains of the tax-exempt business

If there is a balance remaining after attributing the distribution to Categories (a), (b) and (c) (see GREIT08030), the next part of the distribution is out of gains of C (tax-exempt) that have been exempted from tax under section 124 FA 2006. This includes gains arising in the relevant accounting period as well as gains from previous accounting periods that have not already been attributed as distributions from Category (d). Note that the amount of gains in this category is the amount as calculated for TCGA purposes, so will be reduced by indexation relief net of losses realised while in the REIT regime. Any ‘book to tax’ differences linked with disposals of ring fence property will be included in (e) - other (see GREIT08040). For information about the other Categories, see GREIT08020.

For a Group REIT, the definition of gains accruing to C (tax-exempt) includes gains accruing to members of G (property rental business) (paragraph 20 Schedule 17 FA 2006). The limitation to gains that are exempt under section 124 FA 2006 means that the amounts that are available for attribution in Category (d) are gains on all qualifying properties owned by UK resident group members. This is in contrast to gains on any qualifying UK property owned by non-resident group members which will fall into Category (e) - these gains are exempt from UK Tax by virtue of the TCGA residency rules and not under section 124 FA 2006 (which they would need to be in order to fall into Category (d) to be payable as a PID).

In attributing the distributable reserves of the principal company therefore it is not the nature of the profits as they arise to that company, but by reference to the amount of the various kinds of profit that arise to all the members of the group.

Example 6

C has distributable reserves of 500 brought forward. This includes 180 gains from the tax-exempt business of previous accounting periods that has not yet been distributed. The balance of 320 is (e) other reserves. In the accounting period ending 31 December 2010, the income of its tax-exempt business is the same as the accounting measure of profit, and is 1,000. Gains on disposal of assets involved in the tax-exempt business are 70, after deducting 25 indexation allowances. Taxable income from other activities is 130.

Distributable reserves are 1,725. C pays no distributions in 2010 to which profits of the current year are attributed but decides to distribute 1,200 in March 2011 wholly attributed to 2010 profits.

The next step is to deduct the 90% Category (a) requirement (900) from the distributable reserves and allocate the 800 balance to the four elements of the brought forward pot (see GREIT08045). Taxable income (b) is 130, tax-exempt income (c) 100, tax-exempt gains (d) 180 b/f + 70 and other (e) is 320 b/f + 25 book-to-tax adjustment.

The final step is to attribute the 1,200 distribution by reference to the five categories. The first 900 is Category (a) and is a PID payable under deduction of basic rate tax (other than for gross payment cases - see GREIT08125). C decides to attribute nothing to Category (b) (taxable income).

C has no choice about the balance of 300. This is attributed first to Category (c), tax-exempt income, up to the amount in the pot (100). This amount is a PID and payable under deduction of basic rate tax (other than for gross payment cases).

The balance of 200 is then attributed to Category (d), tax-exempt gains, up to the amount in tax-exempt gains pot (250). The remainder of the distribution is therefore all a PID, attributed to Category (d) and payable under deduction of tax (other than for gross payment cases).

The 525 distributable reserves to carry forward will be made up of (b) 130 from ‘taxable income’ (d) 50 gains from the tax-exempt business, and (e) 345 other reserves.