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HMRC internal manual

Guidance on Real Estate Investment Trusts

Miscellaneous: dividend strips: taxation of seller

The tax treatment of the seller of a strip is dealt with below. For the tax treatment of the buyer, see GREIT09180.

Tax treatment of seller of PID - transfers to 21 April 2009

There are no special rules for strips of PID and the normal rules for dividend strips at section 730 ICTA apply.

General rule

Section 730 ICTA provides that in general, the dividends are deemed for all purposes of the Taxes Act to be the income of the beneficial owner of the shares.

All the dividends sold are deemed to be income of the year of the sale, no matter when the dividends actually arise for tax purposes. The amount brought into charge is the full amount of the PID, even though it will have been paid under deduction of basic rate tax.

For corporation tax payers, the deemed income is chargeable to tax under Schedule D, Case VI (section 730(6) ICTA). The company cannot make any claim in respect of the tax deducted from the PID. Unlike a normal dividend, the section 231 ICTA entitlement of the owner of the share to a tax credit is disapplied for PIDs (section 121(5) FA 2006).

For income tax payers, the deemed income is chargeable to tax under section 730(4) ICTA. They are entitled to make claims in respect of the tax deducted on payment of the PID, to the extent they can show the PID has borne the tax (section 730(4B) ICTA).

Tax treatment of seller of PID - transfers on or after 22 April 2009

Schedule 25 to FA 2009 introduced changes in respect of transfers of income streams. In general the sum received for the sale or transfer of the income stream is subject to tax in the transferor’s hands in the same way as the income itself would have been.

Exception to general rule

The exception to the general rule is where the sale proceeds are chargeable to income or corporation tax under other provisions of the Taxes Acts, for instance as the receipt of a trade. The amount that is brought into account is deemed to be the sale proceeds.

For example, bank B has 1,000 shares in UK-REIT A. A declares a PID of 10 in July 2009. B sells to UK company C the right to its PID for 7,750. In the hands of the bank, the 7,750 is a Schedule D Case I receipt. B cannot make any claim in respect of the difference between their sale proceeds and the gross amount of the PID. C receives 8,000 from A and is chargeable to corporation tax at 28% on 10,000 and can offset the 2000 tax deducted from the PID against the amount of CT due.