IFM22113 | Real Estate Investment Trust : Conditions and Tests: maximum shareholding: when a holder of excessive rights (HoER) charge arises: examples

These examples illustrate when a HoER charge might be applied. In the examples, company C is a UK-REIT and has 1,000 ordinary shares in issue. If C has taken reasonable steps to prevent the distribution being made, no HoER charge will be imposed.

None of the HoERs in these examples are excluded holders (see IFM22105).

Example 1 – excessive shareholding sold before dividend date

Company A buys 120 ordinary shares in C on 2 January 2017. C’s dividend dates are 30 June and 31 December. A sells 30 shares on 20 June 2017 (on a ‘cum div’ basis), before the date the dividend is treated as paid for tax purposes. No additional tax charge arises in respect of A’s shareholding given that, when the dividend is paid, A is not a HoER (as its remaining shares of 90 are less than 10%).

Example 2 – excessive shareholder strips dividend

The same facts as example 1, but A decides to retain the 120 shares in C and strip the 30 June coupons. (A dividend strip is where the right to the dividend is sold or transferred without the sale or transfer of the underlying share.) The dividends are sold to three buyers, each of whom buys the right to dividends on 40 shares. Provided none of the three buyers of the strips thereby become a HoER in its own right, no additional charge would arise to C. Although A is a HoER, no tax charge will arise as it is not the beneficial recipient of the dividends.

If however A sold all the dividend strips to a company G, G would be a HoER in its own right, as G would be a company beneficially entitled to 12% of the dividends from C. Payment of the dividend (to G) in these circumstances would trigger a tax charge on C.

Example 3 – nominee

Nominee N is named on the share register as legal owner of 180 of C’s ordinary shares. Although C pays a dividend to N that exceeds 10% of the dividends, the payment does not result in a tax charge on C, unless any of the persons on whose behalf N is holding the shares are HoERs in their own right (which would be the case if N held as nominee for one person only). This is because the nominee arrangement is a bare trust, and so N does not have beneficial entitlement to the dividends or the shares and cannot control associated voting rights in C.

Example 4 – discretionary fund manager

A discretionary fund manager F has clients X and Y. X’s portfolio has 60 ordinary shares in C and Y’s has 80 ordinary shares in C. Under the mandates for both clients, power to vote rests with F. F therefore has direct control of 14% of the voting rights in C and is thereby a HoER. (Note neither X nor Y are HoERs given the size of their interests in C.)

Payment of the dividend to F is therefore subject to the HoER rules. However, the amount of the deemed income brought into charge is limited to the lower percentage of the voting rights held and the dividends beneficially received by the HoER (CTA2010/S552(2) – definition of SO – see IFM22123).

This means that the actual amount of charge is nil since discretionary fund managers (like F) are not normally beneficially entitled to any of the dividends received, even though they may have power to reinvest the dividends on behalf of their clients.

Example 5 – corporate trustee

Company B has two wholly owned subsidiaries, S and T. T is the trustee of pension fund P. P’s investment portfolio includes 6% of the share capital of C, a UK-REIT, so T has control of 6% of the voting rights in C.

Company S has 5% of the shares of C on its trading book at the dividend date. Neither S nor T is a HoER in their own right since each has less than 10% interest in C. The connected party attribution rules that apply to test control for close company and other purposes do not apply here, so the rights of T in C are not attributed to S and vice versa.

Parent company B is a HoER since it controls how each of its subsidiaries can exercise their voting rights in C and so indirectly controls 11% of the voting rights in C. If B has no other interest in C, the charge on C resulting from B being a HoER is nil, since B does not receive any dividends from C - (CTA2010/s552(2)(b)).

If however B had purchased strips of 3% of C’s dividends, then the charge on C would be by reference to the 3% of its dividends received by B (unless C had taken reasonable steps to avoid B becoming beneficially entitled to the dividend).

Note that if the B-T-S group structure were different, such that T is a subsidiary of S, a charge might arise. Then, S would be a HoER since it controls directly or indirectly 11% of the voting rights in C. The charge on C resulting from S’s interest would be by reference to the 5% of dividends to which S is entitled.

Example 6 – trustee of authorised unit trust

Company X is trustee of A Trust, an authorised unit trust (AUT). A Trust’s portfolio includes 6% of C’s shares and X owns 5% of C’s shares in its own right. X therefore has control of 11% of the voting rights in C, so is a HoER. The charge on C is based on 5% of its dividends – being the lower percentage of the voting rights controlled by X and X’s beneficial entitlement to dividends - (CTA2010/S552(2)).