IFM22055 | Real Estate Investment Trust : Conditions and Tests: Distribution Condition: Legal Impediment: CTA2010/S530(3) and (5)

The condition requiring the REIT company, or principal company of the group REIT, to distribute profits from its property rental business is set out in CTA2010/S530. Provision is made to deem this condition to be met where the REIT is prevented by law from distributing the required amount.

Company UK REIT

If the company is prevented by law from meeting the distribution condition, then the condition is regarded as having been met if the company distributes as much as it legally can (CTA 2010/S530, (5) and (7)).

For example, the property rental business income of UK-REIT is 100, but it is prevented by law from distributing 25. The normal distribution requirement would be for UK REIT to distribute 90% of 100 = 90, so the condition is satisfied if it distributes 75.If however, the distributable reserves are 91, it must still distribute 90 to meet the Distribution Condition.

Group UK REIT

In case of a group UK REIT, if the principal company is prevented by law from meeting the distribution condition as a result of any member of the group being prevented from distributing profits, then the condition is regarded as having been met if the principal company distributes as much as it legally can.(CTA2010/S530(3) and (7)).

This is a consequence of how the distribution condition works for Group REITs. It applies to the aggregate of the tax-exempt profits of all the group members.

The principal company cannot get round the distribution requirement by leaving property rental business profits in non-resident subsidiaries and claiming that it has insufficient distributable reserves of its own to pay out to the level required. It is up to the principal company to ensure it has sufficient reserves to meet the requirement by, for example, ensuring that distributions are paid to it from controlled subsidiaries.

Example

Principal company P has property rental business income of 50 and subsidiary S has property rental business income of 100, of which S is prevented by law from distributing 25. The normal distribution requirement would be for P to distribute 90% of 150 = 135, so the condition is satisfied if P distributes 75 + 50 = 125. If however, the unlawful distribution is 5, P would be required to distribute 135 to meet the Distribution condition.

Impediments

A legal impediment for this purpose is something contained in primary or secondary legislation, such as the UK Companies Acts, which prevents a company from making a distribution if its distributable reserves as set out in the accounts are insufficient. This could happen if the property rental business income of an accounting period exceeds the distributable reserves as measured for Companies Act purposes as a result of the disposal at a loss of a property.

A provision in the Memorandum & Articles of Association of a company that puts limits on distributions might be a legal contract between the shareholders and the company but it would not count as a legal impediment that prevented a company distributing sufficient reserves to meet the distribution requirement. In that case, the company would have to pay an additional amount of tax in respect of the shortfall.

Applicable law

For the legal impediment you should accept that, law means UK law (including Northern Ireland legislation and Acts of the Scottish Parliament) (CTA2010/S530(7)). There are however powers to allow laws of other countries to be added by regulation. No regulations have been made under this power.