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 is required to pay to the other 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 temporary holder (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.

There are special rules in CTA2010/ Part 17A and ITA2007/Part 11ZA that seek to treat the payer and recipient of the manufactured dividend 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. In order to ensure that these property income dividends (PIDs) are not treated as ordinary company dividends there are special provisions in CTA2010/ Part 17A to treat the payer and recipient of manufactured PIDs in the same way for tax purposes as if the payment had been an actual PID.

For manufactured dividends that represent the distribution of profits other than those of the property rental business, the normal rules for manufactured dividends apply (see CFM74430 or CFM74300 if the payment was made before 1 January 2014). This includes any dividend paid by a subsidiary of a Group UK-REIT to the principal company or intermediate holding company.