IFM22123 - Real Estate Investment Trust : Conditions and Tests: maximum shareholding: formula to work out notional income: CTA2010/S552

Where the company (or principal company of a Group REIT), has paid out a distribution to, or in respect of a holder of excessive rights (HoER) a tax charge is imposed on the company. The method for calculating the notional income is as follows (CTA2010/S552):

Step 1 Calculate DO x SO x (BRT/MCT)

where:

DO is the total amount of the profits of the group’s UK profits or the company’s profits from its property rental business (as defined by CTA2010/S530(2) distributed by the company or principal company in respect of its ordinary shares. This does not include gains.

SO is the lesser of the percentage of rights:

  • in respect of the company’s ordinary shares held by the HoER, and
  • held by the recipient of the distribution

in respect of which a distribution is made.

BRT is the basic rate of income tax in force when the distribution was made.

MCT is the main rate of CT applicable to the company (principal company in the case of Group REIT).

Step 2 Calculate DP x SP x (BRT/MCT)

DP is total amount of profits of the group’s UK property rental business or the company’s property rental business profits (as defined by CTA2010/S530(2)) distributed by the company/principal company in respect of its preference share capital. This does not include gains.

SP is the lesser of the percentage of rights

  • in respect of the company’s preference share capital held by the HoER, and
  • held by the recipient of the distribution.

in respect of which a distribution is made.

Step 3 Add together the amounts given by steps 1 and 2

The result is the notional income.

DO x SO is the amount of dividend on OSC paid to the excessive shareholder. Multiplying that by BRT calculates the amount of income tax that the company would deduct from that dividend. Dividing by MCT takes account of the fact that the notional income will be chargeable at MCT. This results in a tax charge of the amount of basic rate tax that could potentially be reclaimed in whole or in part under a DTA by the recipient of the distribution.

The second part of the formula makes the same calculation in respect of distributions paid on preference shares.

The charge under CTA2010/S552 refers only to UK property rental business profits; it does not include distributions from property rental business gains.

Example

Company C is a UK-REIT with 100,000 ordinary shares in issue and no preference shares. Its accounting date is 31 December. Basic rate for income tax is 20% and the main CT rate is 19%.

Company A owns 12,000 shares in C. C declares a dividend of 10p per share and pays it on 15 February 2017. A sells its rights to dividends on 4,000 of those shares to an individual and receives the dividend on the remaining 8,000.

A is a HoER because they control 12% of the voting rights and own 12% of the shares in C. A’s beneficial entitlement to dividends is to 8% (= 8,000/100,000).

DO is 10,000 (= 10p x 100,000). A’s beneficial entitlement to dividend is lower than the percentage of the other rights they hold in C, so SO is 8%.

The notional income arising to C (residual) in accounting period ending 31 December 2017 is therefore 10,000 x 8% x 20%/19% = 842.10. The amount of CT due is (£842 x 19%) 160 (which is 20% of the 800 dividend payable to A).