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HMRC internal manual

Investment Funds Manual

Real Estate Investment Trust : Distributions: manufactured payments: deduction of tax

Payment of MPID representing a PID from the tax-exempt property rental business

As IFM28210 explains, any withholding tax obligation imposed by SI2006/2867 in respect of a real PID is deemed to have been deducted in respect of the deemed MPID.  Likewise where the MPID is representative of a dividend in respect of profits of the tax-exempt property rental business of a company then the rate of withholding tax in relation to the manufactured PID will be exactly the same as if the real PID of which the MPID is representative were paid directly by the UK-REIT to the recipient of the MPID.  Where that rate is nil (e.g. because the MPID is paid to a UK company and the rate between a UK-REIT and a UK company would normally be nil) then the MPID will also be paid under deduction of nil tax.

Obligation to deduct income tax on payment of MPID

Regulations made under ITA2007/S973 and S974 (SI 2006/2867) require a company that pays a distribution out of tax-exempt property rental business profits to deduct income tax and account for it to HMRC.  The same regulations apply to payment of an MPID by the payer of the MPID, and apply regardless of whether or not the payer of the MPID is a company. 

There will only be an obligation to deduct income tax from the MPID where the recipient would normally receive a real PID under deduction of tax.

The only exception to this obligation is where the MPID is paid other than in connection with an activity that is subject to UK tax.  There are however powers to make regulations requiring the UK recipient of the MPID to account for tax equal in amount to that which the payer of the MPID would have otherwise deducted.  

PIDs where rights to the distribution have been transferred or sold

Under SI2006/2867/reg7(7), PIDs are always paid under deduction of basic rate tax where the rights to the distribution have been transferred or sold, without selling the underlying shares.  This is regardless of the nature of the person beneficially entitled to the PID.