IFM28210 - Real Estate Investment Trust : Distributions: manufactured payments: manufactured PIDs

For payments made before 1 January 2014, FA2006/S139 set out rules for manufactured dividends that represent payments of distributions of the tax-exempt income of a Real Estate Investment Trust, referred to here as manufactured property income dividends (MPIDs).

For manufactured dividends that represent the distribution of other profits of a UK-REIT, the normal rules for manufactured dividends in ICTA1988/Schedule 23A applied (see CFM74300).

The meaning of ‘dividend manufacturer’ was the same as is set out in ICTA1988/Sch23A/para2(1). This is a party to arrangements to transfer UK equities who is required to pay the other party an amount (a ‘manufactured dividend’) which is representative of a dividend on the equities.

For payments made on or after 1 January 2014, the legislation applying to other types of manufactured payments, but not MPIDs, was simplified, and the provisions can now be found in CTA 2010/ Part 17A. Manufactured dividends are now defined in CTA2010/S814B.

Taxation of recipient CTA2010/S814D)

The recipient of an MPID is treated for tax purposes in the same way as the recipient of an actual dividend paid out of the tax-exempt profits of the property rental business by a UK-REIT. The principal effect of this is that the receipt is treated as property income in the hands of the recipient in most cases.

The amount of the MPID that is taxable on the recipient is equal to the amount of the real dividend paid by the UK-REIT. This is notwithstanding that the actual amount of the MPID may exceed this.

Tax treatment of payer of manufactured dividend (CTA2010/S814C)

The payment of the MPID by the payer is treated as:

· an expense of a trade if paid by a company in the course of its trade, or;

· a management expense if paid in connection with an investment business, or;

· an expense of a life assurance business (or business of an insurance company treated as life assurance business by virtue of FA2012/Part 2.

The amount of the MPID that is deductible for the manufacturer is equal to the amount of the real dividend paid by the UK-REIT. This is notwithstanding that the actual amount of the MPID may exceed this.

Repos – repurchase price reflects dividend

As part of a sale and repurchase agreement (repo), there might be no actual payment made between the parties. Instead, the repurchase price of the shares would be reduced to reflect a property income dividend receivable otherwise than by the original owner. This may happen if the repo takes place over a dividend date. In these circumstances, the temporary holder is deemed to make an MPID.

The amount of the deemed MPID is equal to the gross amount of the actual property income dividend paid by the UK-REIT before the deduction of any withholding tax (the ‘gross’ amount). Any withholding tax obligations imposed by SI 2006/2867 in respect of a real property income dividend is deemed to have been deducted in respect of the deemed MPID. The repurchase price of the shares that are the subject of the repo is deemed to be increased by the gross amount of the property income dividend received from the UK-REIT.