IFM28300 - Real Estate Investment Trust : Distributions: Taxation of Investors: Corporation tax payers: CTA2010/S548 and S549

For corporation tax payers, Property Income Distributions (PIDs) are generally taxable as income from a property business. This is unlike normal company distributions, which are exempt from tax in the hands of most UK companies.

 

CTA2010/S548 provides that a distribution of exempt profits or gains of UK-REIT company/group, or by a post-cessation REIT company/group, to a shareholder within the charge to corporation tax is to be treated as profits of a UK property business within the meaning given by CTA2009/S205.

 

The profits or gains are those reported in the financial statement under CTA2010/S532(2)(a), the group’s property rental business in the accounting period calculated in accordance with international accounting standards. This therefore includes all profits and gains of the group’s property rental business. However the “Exempt profits or gains” are the amounts attributed to pots (a) (PIDs received from other UK-REITs), (aa) (PIDs in satisfaction of the 90% distribution requirement), (c) (PIDs from remaining property rental business profits) and (d) (PIDs from property rental business gains exempt under CTA2010/S535).

 

PIDs will in general be paid gross to persons within the charge to UK corporation tax. SI2006/2867 (Real Estate Investment Trusts (Assessment and Recovery of Tax) Regulations 2006)/regulation 7 provides for gross payment of PIDs to a company resident in the United Kingdom for corporation tax purposes and to a non-UK resident company that carries on a trade in the United Kingdom through a permanent establishment (PE) and is required to bring the PID into account in computing the chargeable profits of the PE.

 

All PIDs received by a corporation tax payer are treated as income from a single property business, separate from any other UK or overseas property rental business carried on by the tax payer (CTA2010/S549). The exception to the property business treatment is where the recipient is a member of Lloyd’s or a financial trader, when the PID is treated as a receipt of their Schedule D Case I trade.

 

There are no special rules regarding disposals by a company of shares in a UK-REIT, apart from where shares are held as part of the long-term fund of a life assurance company. In these circumstances, the shares are treated in the same way as shares in AUTs and OEICs, with changes in fair value of the holding taxable each year.

 

If a UK REIT receives a PID from another UK REIT this is treated as received by the recipient UK-REIT as property rental business separate from its own property rental business (CTA2010/S549A). The PID is “UK REIT investment profits” and 100% of this income must be distributed by the recipient REIT to its shareholders.

 

Authorised Investment Funds

There are no special rules for PIDs in the hands of most authorised investment funds (AIFs). They are payable gross because an AIF is within the charge to CT.

For the purposes of the corporate streaming rules in SI2006/964/(Authorised Investment Funds (Tax) Regulations) regulations 48 to 50, PIDs count as unfranked income. Under these rules, a participator in the AIF which is within the charge to CT is treated as though they had received an annual payment, paid under deduction of lower rate (20%) to the extent the distribution from the AIF reflects unfranked income.

However, PIDs are not payable gross to a Tax Elected Fund, within the meaning given by SI2006/964 regulation 69Z42(2).

 

Approved Investment Trusts

There are no special rules for PIDs in the hands of an investment trust company that is approved by HMRC for the purposes of CTA2010/S1158. They are payable gross because an approved investment trust company is within the charge to CT.

Distributions from a UK-REIT are income derived from shares for the purposes of CTA2010/S1158, even though they are taxable in the hands of the investment trust company as Schedule A income.