IFM28035 - Real Estate Investment Trust : Distributions: attribution rules: category (d) - gains of the property rental business: CTA2010/S550(2)(d)

If there is a balance remaining after attributing the distribution to Categories (a), (aa), (b) and (c) (see IFM28030), the next part of the distribution is out of gains accruing to the property rental business (PRB) that have been exempted from tax under CTA2010/S535 or S535A, the relevant non-chargeable gains. This includes gains arising in the relevant accounting period as well as gains from previous accounting periods that have not already been attributed as distributions from Category (d). Note that the amount of gains in this category is the amount as calculated for TCGA purposes, so will be reduced by indexation relief net of losses realised while in the REIT regime, where applicable. Any ‘book to tax’ differences linked with disposals of ring fence property will be included in (e) – other (see IFM28040). For information about the other Categories, see IFM28010.

In attributing the distributable reserves of the principal company it is not the nature of the profits as they arise to that company, but by reference to the amount of the various kinds of profit that arise to all the members of the group.

The attribution of the distribution to Category (d) may be restricted by the total amount of reserves available. It is not possible to attribute distributions in excess of the reserve available in Category (d).

Example 6

C has distributable reserves of 500 brought forward. This includes 180 gains from the property rental business of previous accounting periods that have not yet been distributed. The balance of 320 is (e) other reserves. In 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. Gains on disposal of assets involved in the property rental business are 70. Taxable income from other activities is 130.

Distributable reserves are 1,700. C pays no distributions in 2017 to which profits of the current year are attributed but decides to distribute 1,200 in March 2018 wholly attributed to 2017 profits.

The next step is to deduct the mandatory categories (a) 100 and (aa) 810 total (910) from the distributable reserves and allocate the 790 balance to the four elements of the brought forward reserves. Taxable income (b) is 130, property rental business income (c) 90, relevant non-chargeable gains (d) 180 b/f + 70 and other (e) is 320 b/f.

The final step is to attribute the 1,200 distribution by reference to the five categories. The first 100 is Category (a) plus 810 Category (aa), total 910 PID payable under deduction of basic rate tax (other than for gross payment cases – see IFM28125). C decides to attribute nothing to Category (b) (taxable income).

C has no choice about the balance of 290. This is attributed first to Category (c), property rental business income, up to the amount in the Category (90). This amount is a PID and payable under deduction of basic rate tax (other than for gross payment cases).

The balance of 200 is then attributed to Category (d), relevant non-chargeable gains, up to the amount in the relevant non-chargeable gains Category (250). The remainder of the distribution is therefore all a PID, attributed to Category (d) and payable under deduction of tax (other than for gross payment cases).

The 500 distributable reserves to carry forward will be made up of (b) 130 from ‘taxable income’ (d) 50 gains from the property rental business, and (e) 320 other reserves.

This table summarises the position:

Category	reserves at 31-Dec-16	allocate profits of 2017	reserves c/f	attribute 2017 final distribution Mar-18	reserves c/f
(a)	-	100	100	(100)	-
(aa)	-	810	810	(810)	-
(b)	-	130	130	-	130
(c)	-	90	90	(90)	-
(d)	180	70	250	(200)	50
(e)	320	-	320	-	320
totals	500	1,200	1,725	(1,200)	500