IFM28028 - Real Estate Investment Trust : Distributions: attribution rules: category (b) - income from taxable activities: examples

Facts for examples 2 and 3

C becomes a UK-REIT on 1 January 2017, has no distributable reserves brought forward once it has paid out the final distribution for 2016 (which was all paid as a non-PID). For the accounting period ending 31 December 2017, the income of its property rental business is 1,000, the same as the accounting measure of profit, and includes 100 PID received from shares held in another UK-REIT. The gains as measured for TCGA purposes on disposals of properties involved in the property rental business, the relevant non-chargeable gains, are 100 and equal to the gains measured for accounting profits. Taxable income from other activities is 130 and chargeable gains from other activities are 70. The company’s income accrues evenly over the year. Distributable reserves in respect of 2017 are 1,300.

C does not pay an interim distribution for first half 2017 and in March 2018, declares a final distribution in respect of 2017 of 950. C does not pay any further distributions in 2018 and chooses not to attribute any of the March 2018 dividend to 2018 profits. Category (a) is 100 and (aa) is 90% of 900 = 810, total PID is 910 payable under deduction of basic rate tax (see Example 1(1) at IFM28023).

Example 2

C then has three choices.

1. C may want to maximise the non-PID dividend, so attributes all the excess over the 910 PID to being a normal company dividend payable out of income from taxable activities. This balance of 40 is therefore payable gross. The 350 distributable reserves to carry forward will be made up of (b) 90 from taxable income, (c) 90 income from the property rental business, (d) 100 relevant non-chargeable gains, and (e) 70 other reserves.

2. C may decide it is easier administratively to pay out all the distribution under deduction of tax. C therefore attributes none to Category (b). See Example 4(1) at IFM28030 for what happens to the balance.

3. C may decide to split the balance 30 attributable to taxable income and 10 to income of the property rental business. 30 is therefore paid gross as a normal company dividend. See Example 4(2) at IFM28030 for what happens to the balance.

Example 3

C has no distributable reserves brought forward. In accounting period ending 31 December 2017, the income of its property rental business is 1,000 but the accounting measure of the income is 1,200 (the difference being the excess of capital allowances over deprecation for the period). Taxable income from other activities is 130. Distributable reserves are 1,330. C decides to distribute 1,210 in March 2018.

Category (a) is 100 and (aa) is 90% of 900 = 810, total PID 910 payable under deduction of basic rate tax (other than for gross payment cases – see IFM28125).

As in Example 2(1), C wants to maximise the non-PID dividend. The balance of 300 is therefore attributable in full to (b), which in this case is made up of 130 from other taxable activities plus 170 of the 200 difference between the accounting and tax measures of the income of the property rental business.

The 120 distributable reserves to carry forward will be made up of (c) 90 income from the property rental business and 30 that will be available for Category (b) attribution in future periods as ‘taxable income’.