IFM22140 - Real Estate Investment Trust : Conditions and Tests: maximum shareholding: reasonable steps: payment of a distribution where rights to it are transferred: CTA2010/S551(1)(b)

If the company, (principal company in the case of a Group REIT) , has taken reasonable steps to prevent paying a dividend to a holder of excessive rights (HoER), then some or all of the additional charge will not be imposed. HMRC has provided criteria which, if met, may be accepted as reasonable steps (IFM22125).

The third criterion for arrangements to be reasonable is that the company, (principal company in the case of a Group REIT), needs a mechanism to allow distributions to be paid on shares that form part of an excessive shareholding where the right to the distribution has been transferred. The company can satisfy this requirement by obtaining a certificate from the shareholder that the right to the distribution had been transferred. The certificate should also include confirmation that the transferees are not, or have not become, HoERs as a result of acquiring the right to the distributions.

Certification by the shareholder is needed because it would not be easy from its own records for the company or its registrar to establish that a transfer of the right to the distribution had taken place. This is because no entry would be needed in the share register as the transfer would normally be affected by a mandate to the registrar to pay the distribution to a different person than the registered holder of the shares, but such a mandate would not necessarily indicate that the right to the distribution had been transferred.

It would not be necessary for the company to require a new certificate for each distribution payment, provided the certificate included an undertaking that all future distributions would also be disposed of. For on-going certificates, it should include an undertaking on the shareholder to inform the company immediately the circumstances which gave rise to the certificate changed. The company needs to be able to withhold payment of a future distribution or force sale of the shares if it believes the undertakings in the certificate have not been complied with.

Transfer of rights to distributions

There are a number of legal arrangements that transfer the rights to distributions, including a dividend strip, under which legal ownership of the shares is not transferred at the same time as the right to the distribution is transferred. For information on the tax treatment of dividend strips, see ITM164090. Note that there is a range of anti-avoidance rules that apply when dividends are stripped, and they are NOT dis-applied just because a Property Income Distribution (see IFM28230) is stripped to avoid the company incurring a charge under CTA2010/S551.

Transfers can also happen under stock lending or repo arrangements, where the legal (but not the economic) ownership of the shares is transferred. Where the arrangements take place over a dividend date, the transfer of rights will include transfer of beneficial ownership of the dividend and a manufactured dividend payable by the stock borrower – see IFM28200 for information on tax rules for manufactured PID and CFM74300 for rules on manufactured dividends in general.

Compliance

The company does not need to verify independently the accuracy of any certificate relied on for these purposes and may rely on it unless it is obviously suspect. The Articles of Association could make provision to force sale of the shares and for the company to retain from the proceeds any additional tax [and any costs borne by the company] as a result of misrepresentation by that shareholder (see IFM22135). Note that this certification process does not indemnify the company against a charge under CTA2010/S551 – it merely provides for civil redress from the shareholder who has misled them.

The company would need to retain these certificates and be willing to supply them to HMRC if ever there were a treaty claim in respect of a dividend on an excessive holding.