IFM22060 | Real Estate Investment Trust :Conditions And Tests: Distribution Condition: Interaction With 10% Maximum Shareholding Rule: CTA2010/S530(6)

The condition requiring the REIT company, or principal company of the group REIT, to distribute profits from its UK property rental business is set out in CTA2010/S530. Provision is made to deem this condition to be met where the REIT withholds a distribution in order to prevent a charge under the ‘holders of excessive rights provisions’ (CTA2010/S551).

In some circumstances, the company may withhold payment of some of the declared dividend as a result of reasonable steps taken to avoid or reduce a tax charge under CTA2010/S551 (the 10% Rule). (IFM22125) These steps may include provisions in the Memorandum and Articles of Association (M&A) that allow the company to withhold paying a dividend to, or in respect of, certain shareholders with an interest of 10% or more in the company (a holder of excessive rights in the company – HoER).

Where the company has such a provision in its M&A, and does in fact withhold payment to, or in respect of an excessive shareholding, the company is regarded as having met the Distribution Condition if it would have done otherwise.

Example

Company C (a UK-REIT) has 100 shares, with one shareholder SH Limited owning 20 shares at the dividend date. The property rental business income of accounting period (AP) 1 is 1,000, and C declares a dividend of 9.5 per share. Under its M&A, C can retain dividends payable in respect of a substantial shareholding until the shareholder has reduced their holding to below 10%.

At the end of AP 2, SH Limited still has 20 shares, so by the time limit (the CTSA filing date for the AP in question), C has distributed 760 and retained 190. Although the amount paid out is less than 900 (the 90% minimum normally required), the company will not be subject to a charge under s551.

If SH Limited sells 15 shares during AP 2 but C delays paying out the retained dividends until after the filing date for AP1, C will incur a tax charge based on notional income of 900 - 760 = 140. This is because at the time limit, the dividend is withheld because C has not got round to paying it out and not because section 551 applies.

For Group REITs, the maximum shareholding rule in CTA2010/S551 operates in respect of shares in the principal company of the group. For more detail on how this operates, see IFM22100 onwards.

If any charge in respect of a company holding an interest of 10% or more in the principal company arises, it is levied on the principal company. It is collected by assessing other chargeable income on the residual part of that company see IFM22110.

There are no restrictions on ownership of shares in subsidiary members of the group. No tax charge arises if a dividend is paid in respect of a company which has an interest of 10% or more in the subsidiary.