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HMRC internal manual

Investment Funds Manual

Real Estate Investment Trust : Breaches of conditions: Distribution Condition: general: CTA2010/S564

The company (principal company in the case of Group REIT) must distribute as property income dividends, 100% of distributions received from other UK-REITs (“UK REIT investment profits” per CTA 2010/S549A) plus 90% of the income of its tax-exempt property rental business (CTA2010/S530 (1)). The distribution requirement must be met in respect of each accounting period of the company, and must be met by the filing date for the CTSA return for that accounting period. 

If the company has distributed less than the required amounts of the tax-exempt property rental business profits for any of the following reasons: 

  • legal impediment to distribution (see IFM22055),
  • finally agreed measure of property rental business profits is higher than the amount returned (see below),
  • sufficient property income distributions are declared but not paid out to certain shareholders as a result of reasonable steps taken in connection with the 10% rule (see IFM22105), or
  • where a REIT pays its property income distribution by way of a stock dividend, the stock dividend is offered with a particular cash dividend alternative but the value of the shares when issued has fallen significantly so that the fall in price is greater than 15% of the market value of the shares issued and the REIT remedies the distribution requirement position within six months of its filing date (CTA2010/S530(6D)),
  • the company (or group) can remain in the regime and the minor breach provisions are not invoked. 

Failure to meet the Distribution Condition for any reason other than these (unless the breach is regarded as serious) does not result in removal from the regime.  For minor breaches, the remedy is a tax charge on the company, to make good any shortfall in tax that would have been deducted had the full amount been distributed by the right date, as set out in CTA2010/S564.  For details of when and how the CTA2010/S564 tax charge is calculated, see IFM27050.    

Post-filing day adjustments to computation of property rental business profits

The measure of profits for the distribution requirement is the income as measured for tax purposes of the property rental business.  The company will include an amount on its CTSA return for the period, but this may be altered subsequently, for example as the result of an HMRC enquiry.  If the profit that is eventually agreed is higher than the amount returned, it is possible that the company will not have paid enough PID by the CTSA filing date to meet the distribution requirement. 

Provided the company declares and pays an additional PID to reflect the higher distribution requirement within three months of the day from which the profits can no longer be altered, no tax charge arises to the company under CTA2010/S564.   Note that an additional dividend declared to avoid a section 564 charge does not count towards meeting the distribution requirement for any other accounting period.  

‘Can no longer be altered’ means when the assessment for the accounting period is final.  Where there has been an enquiry into the return, the assessment can no longer be altered once either the company or HMRC has amended the original self-assessment to the finally agreed profits and the time limit to object to that amendment has passed.