IFM28200 - Real Estate Investment Trust : distributions: manufactured payments: background
Manufactured payments arise where, under a contract or other arrangement for the transfer of securities, one party (the dividend manufacturer) is required to pay to the other (the transferor) an amount representative of interest or a dividend on those securities. They normally arise under repos or stock loans where the transaction crosses an interest or dividend date. The dividend manufacturer makes a payment (a manufactured payment) to the transferor as compensation for the dividends or interest the transferor would have received in the absence of the repo or stock loan.
Manufactured payments may also arise where a person sells securities cum dividend but delivers ex dividend stock.
The general tax rules for manufactured payments are found at CTA2010/Part 17A and ITA2007/Part 11ZA. These seek to treat the payer and recipient of a manufactured payment in broadly the same way for tax purposes as though the payment had been of an actual dividend.
Distributions out of tax-exempt property rental business income and gains of a UK REIT are generally treated as income from UK property in shareholders’ hands and paid under deduction of basic rate tax. Manufactured payments relating to loan of shares in a UK REIT which are paid in compensation for the property income distributions (PIDs) the transferor would have received in the absence of the stock loan are known as a manufactured PID (MPID). In order to ensure that a MPID is taxed in the same way as the PID it represents, and not taxed as an ordinary company dividend (as would be the case for a general manufactured dividend), there are separate rules for manufactured payments relating to REIT shares. (see IFM28210).
For manufactured dividends that represent the distribution of profits other than those of the property rental business (i.e. non-PID distributions), the normal rules for manufactured dividends apply. A dividend paid by a subsidiary of a Group UK-REIT to the principal company or intermediate holding company will not be within the MPID rules as it does not relate to a payment of PIDs.