IFM28050 - Real Estate Investment Trust : Distributions: attribution rules: first accounting period as a UK-REIT: CTA2010/S550
Final distribution for last pre-entry accounting period
Where a company joins the regime at the start of a period of account, the final distribution declared in respect of profits for the last pre-entry period will, in general, be entirely normal dividends.
Although HMRC has no objection to a company paying part of it as a PID (to reflect the property rental business income arising in the period from the end of the last pre-entry accounting period to the date the distribution is declared), shareholders may be expecting that distribution to be wholly non-PID.
Interim distributions during first accounting period as a UK-REIT
If the company makes an interim distribution during the first accounting period as a UK-REIT, it is up to the company how it attributes the payment between PID and normal dividend (see IFM28045). Some or all of that may be a PID, but there are dangers in treating the entire interim distribution as a normal dividend.
Companies joining the regime part way through a period of account
A company may join the regime part way through a period of account: for example, the accounting reference date may be 31 March, and the company elects to join the regime with effect from 1 January 2017. For tax purposes, the 12 month period of account in which the company joins the regime is divided into two accounting periods, a nine month period ending in 31 December 2016 and a three month period from 1 January to 31 March 2017.
The three-month accounting period is the company’s first accounting period in the regime and if any interim distribution is paid during that period in respect of year to 31 March 2017 results, it will generally be entirely a normal dividend.
The company’s final distribution for the year to 31 March 2017 will generally be paid in summer 2017. This will cover three months when the company was carrying on property rental business within the regime, and depending on if or when any interim distributions for that year were paid, up to nine months of pre-entry profits. A company in this situation may well want to attribute up to a quarter of that final distribution to Category (aa), depending on the ratio of property rental business profits to other profits in the final three months of the period.
Pre-entry distributable reserves
Existing property companies that convert to UK-REIT status may enter the regime with large amounts of undistributed reserves. Before joining the regime, it was not necessary for a company to decide which income, gains etc. gave rise to what was in reserves. On joining the regime, companies may take a pragmatic approach to allocating the total amount between (b) ‘income from taxable activities’ and (e) ‘other’. Although allocating more to the taxable income pot gives a bigger cushion for paying out pre-entry profits as normal dividends post-entry, distributions attributable to either category are payable as normal dividends. Once the company has allocated its existing reserves as part of the reconciliation at the end of the first accounting period as a UK-REIT, the company cannot alter the allocation.