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HMRC internal manual

Guidance on Real Estate Investment Trusts

Miscellaneous: manufactured payments: background

Manufactured payments arise where, under a contract or other arrangement for thetransfer of securities, one party is required to pay to the other an amount representativeof interest or a dividend on those securities. They normally arise under repos or stockloans where the transaction crosses an interest or dividend date. The temporary holder(the dividend manufacturer) makes a payment (a manufactured payment) to the transferor ascompensation for the dividends or interest the transferor would have received in theabsence of the repo or stock loan. Manufactured payments may also arise where a personsells securities cum dividend but delivers ex dividend stock.

There are special rules in Schedule 23A ICTA that seek to treat the payer and recipient ofthe manufactured dividend in broadly the same way for tax purposes as though the paymenthad been of an actual dividend.

Distributions out of the tax-exempt income of a UK-REIT are treated as income from UKproperty, and paid under deduction of basic rate tax. If these property income dividends(PIDs) were part of manufactured payment arrangements, the existing rules in Schedule 23Awould treat the manufactured PIDs as ordinary company dividends. There are thereforespecial provisions in the UK-REIT legislation to treat the payer and recipient ofmanufactured PIDs in the same way for tax purposes as if the payment had been an actualPID.

For manufactured dividends that represent the distribution of profits other than those ofthe tax-exempt business, the normal rules for manufactured dividends in Schedule 23A ICTAapply (see CFM17300). This includes any dividend paid by a subsidiary of a Group REIT tothe principal company or intermediate holding company.