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HMRC internal manual

Guidance on Real Estate Investment Trusts

HM Revenue & Customs
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Miscellaneous: manufactured payments: manufactured PIDs

Section 139 FA 2006 sets out rules for manufactured dividends that represent payments ofdistributions of the tax-exempt income of a Real Estate Investment Trust, referred to hereas manufactured property income dividends or MPIDs. For manufactured dividends thatrepresent the distribution of other profits of a UK-REIT, the normal rules formanufactured dividends in Schedule 23A ICTA apply (see CFM17300).

The meaning of ‘dividend manufacturer’ is the same as is set out in paragraph 2(1)Schedule 23A ICTA. This is a party to arrangements to transfer UK equities who is requiredto pay the other party an amount (a ‘manufactured dividend’) which is representative of adividend on the equities.

Taxation of recipient

The recipient of an MPID is treated for tax purposes in the same way the recipient ofan actual dividend paid out of tax-exempt profits by a UK-REIT. The principal effect ofthis is that the receipt is treated as property income in the hands of the recipient inmost cases.

The amount of the MPID that is taxable on the recipient is equal to the amount of the realdividend paid by the UK-REIT. This is notwithstanding that the actual amount of the MPIDmay be different from this.

Tax treatment of manufacturer

The payment of the MPID by the manufacturer is treated as either:

  • an expense of a trade if paid by a company in the course of its trade, or;
  • a management expense if paid in connection with an investment business, or;
  • an expense of a life assurance business (or business of an insurance company treated as life assurance business by virtue of section 432A ICTA).

The amount of the MPID that is deductible for the manufacturer is equal to the amountof the real dividend paid by the UK-REIT. This is notwithstanding that the actual amountof the MPID may be different from this.

Repos – repurchase price reflects dividend

As part of a sale and repurchase agreement (repo), there might be no actual paymentmade between the parties. Instead, the repurchase price of the shares would be increasedto reflect a property income dividend receivable otherwise than by the original owner.This may happen if the repo takes place over a dividend date. In these circumstances, thetemporary holder is deemed to make an MPID.

The amount of the deemed MPID is equal to the gross amount of the actual property incomedividend paid by the UK-REIT before the deduction of any withholding tax (the‘gross’ amount). Any withholding tax obligations imposed by SI 2006/2867 inrespect of a real property income dividend is deemed to have been deducted in respect ofthe deemed MPID. The repurchase price of the shares that are the subject of the repo isincreased by the gross amount of the property income dividend received from the UK-REIT.