IFM22120 | Real Estate Investment Trust : Conditions and Tests: maximum shareholding: nature and amount of charge : CTA2010/S551 - S552

Where the company (principal company in the case of a Group REIT), has paid out a distribution to, or in respect of a holder of excessive rights (HoER) in the company and that holder is not an excluded holder (see IFM22100) a tax charge is imposed on the company. This is to make good any possible loss of tax that could arise if the recipient were able to reclaim under a double tax treaty all or a substantial part of the tax deducted at source from the distribution.

Nature of the charge CTA2010/S552

The notional income is deemed to be other chargeable income under CTA2009/S979 arising to the residual business. It cannot be reduced by any other losses, group relief, allowances or deficits (CTA2010/S551(7). For a Group REIT, the charge under CTA2010/S551 is on the principal company.

Amount of the charge (CTA2010/S552)

The amount is worked out by reference to the distribution that is paid to the HoER. It is not restricted to the excess over 10%. For example, if A owns 12% of the ordinary share capital (OSC) of company C (a UK-REIT) and B owns 24% of C’s OSC, the notional income in respect of B will be double that in respect of A (and not seven times as much).

The formula to calculate the notional income is in two parts: one relates to the distribution paid in respect of OSC; the other to the distribution paid in respect of preference shares. It is explained in more detail in IFM22123. The aim of the formula is to charge the company by reference to the percentage of the company’s distribution to which the HoER is beneficially entitled, if that is lower than the percentage by reference to voting rights or shareholding. This is illustrated by an example in IFM22123.