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HMRC internal manual

Guidance on Real Estate Investment Trusts

HM Revenue & Customs
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Distributions: attribution rules: first accounting period as a UK-REIT

Final distribution for last pre-entry accounting period

Where a company joins the regime at the start of a period of account, the finaldistribution declared in respect of profits for the last pre-entry period will, ingeneral, be entirely normal dividends.

Although HMRC has no objection to a company paying part of it as a PID (to reflect thetax- exempt income arising in the period from the end of the last pre-entry accountingperiod to the date the distribution is declared), shareholders may be expecting thatdistribution to be wholly non-PID.

Interim distributions during first accounting period as a UK-REIT

If the company makes an interim distribution during the first accounting period as aUK-REIT, it is up to the company how it attributes the payment between PID and normaldividend (see GREIT08045). Some or all of that may be a PID,but there are dangers in treating the entire interim distribution as a normal dividend.

Companies joining the regime part way through a period of account

A company may join the regime part way through a period of account: for example, theaccounting reference date may be 31 March, and the company elects to join the regime witheffect from 1 January 2007. For tax purposes, the 12 month period of account in which thecompany joins the regime is divided into two accounting periods, a nine month periodending in 31 December 2006 and a three month period from 1 January to 31 March 2007.

The three-month accounting period is the company’s first accounting period in theregime and if any interim distribution is paid during that period in respect of year to 31March 2007 results, it will generally be entirely a normal dividend.

The company’s final distribution for the year to 31 March 2007 will generally be paidin summer 2007. This will cover three months when the company was carrying on tax-exemptbusiness, and depending on if or when any interim distributions for that year were paid,up to nine months of pre-entry profits. A company in this situation may well want toattribute up to a quarter of that final distribution to Category (a), depending on theratio of tax-exempt income to other profits in the final three months of the period.

Pre-entry distributable reserves

Existing property companies that convert to UK-REIT status may enter the regime withlarge amounts of undistributed reserves. Before joining the regime, it was not necessaryfor a company to decide which income, gains etc gave rise to what was in the pot. Onjoining the regime, companies may take a pragmatic approach to allocating the total amountbetween (b) ‘income from taxable activities’ and (e) ‘other’. Althoughallocating more to the taxable income pot gives a bigger cushion for paying out pre-entryprofits as normal dividends post- entry, distributions attributable to either pot arepayable as normal dividends. Once the company has allocated its existing reserves as partof the reconciliation at the end of the first accounting period as a UK-REIT, the companycannot alter the allocation.