The following paragraphs are intended as a general guide only [on dividends under the REITs regime] and constitute a summary of the Company’s understanding of current UK law and HMRC practice, each of which is subject to change, possibly with retrospective effect. They are not advice. As at the date of this document, HMRC’s detailed guidance on the REIT regime has not yet been finalised. This guidance could change the position described below.
Overview
The REIT regime, introduced in the Finance Act 2006, is intended to encourage greater investment in the UK property market and follows similar legislation in other European countries such as the Netherlands, as well as the long-established regimes in the United States and Australia.
In this Part, Group means a body corporate and all of its “75 per cent. subsidiaries” and any of their 75 per cent. subsidiaries and so on, provided that the principal company in the group is beneficially entitled to more than 50 per cent. of the subsidiary’s profits which are available for distribution to equity holders of the subsidiary, and more than 50 per cent. of any assets of the subsidiary available for distribution to its equity holders on a winding-up, and excluding insurance companies as defined in section 431(2) of the Income and Corporation Taxes Act (ICTA) and their subsidiaries. A body corporate is a “75 per cent. subsidiary” of another if the other is the beneficial owner (directly or indirectly) of at least 75 per cent. of its ordinary share capital.
Currently, investing in property through a typical UK corporate investment vehicle (such as the Company) has the disadvantage that, in comparison to a direct investment in property assets, some categories of shareholder effectively suffer tax twice on the same income - first, indirectly, when members of the Group pay UK direct tax on their profits, and secondly, directly (but with the benefit of a tax credit) when the shareholder receives a dividend. Non taxpaying entities, such as UK pension funds, suffer tax indirectly when investing through a corporate vehicle that is not a REIT.
As part of a REIT, UK resident Group members and non-UK resident Group members with a UK qualifying property rental business would no longer pay UK direct taxes on income and capital gains from their qualifying property rental businesses in the UK and elsewhere (the Tax-Exempt Business), provided that certain conditions are satisfied. Instead, distributions in respect of the Tax-Exempt Business will be treated for UK tax purposes as UK property income in the hands of shareholders (Part 3 contains further detail on the United Kingdom tax treatment of shareholders in a REIT regime). However, corporation tax will still be payable in the normal way in respect of income and gains from the Group’s business (generally including any property trading business) not included in the Tax Exempt Business (the Residual Business).
In this Part, property rental business means a Schedule A business within the meaning of section 832(1) ICTA or an overseas property business within the meaning of section 70A(4) ICTA, but, in each case, excluding certain specified types of business. A qualifying property rental business means a property rental business fulfilling the conditions in section 107 of the Finance Act 2006.
While within the REIT regime, the Tax-Exempt Business will be treated as a separate business for corporation tax purposes from the Residual Business and a loss incurred in the Tax-Exempt Business cannot be set off against profits of the Residual Business (and vice versa).
The principal company of a REIT will be required to distribute to shareholders (by way of dividend), at least 90 per cent. of the income profits arising in each accounting period of the UK-resident members of the Group in respect of their Tax-Exempt Business and of the non-UK resident members of the Group in respect of their UK qualifying property rental business. The distribution must be made on or before the filing date for the REIT’s tax return for the accounting period in question. Income profits for these purposes are to be calculated, broadly, in accordance with normal tax rules. Failure to meet this requirement will result in a tax charge calculated by reference to the extent of the failure, although this charge can be avoided if an additional dividend is paid within a specified period which brings the amount of profits distributed up to the required level.
In this document, references to a company’s accounting period are to its accounting period for tax purposes. This period can in some circumstances differ from a company’s accounting period for other purposes.
A dividend paid by the Company in respect of profits or gains of the Tax-Exempt Business of the members of the Group is referred to in this circular as a Property Income Distribution or PID. Any other dividend paid by the Company will be referred to as a Non-PID Dividend.
The treatment of a dividend paid by the principal company in the Group in the first year after it becomes a REIT should depend on whether it is paid out of profits that arose before or after the Group became a REIT. The Company will provide shareholders with a certificate setting out how much of their dividend is a PID and how much is a Non-PID Dividend.
Subject to certain exceptions, Property Income Distributions will be subject to withholding tax at the basic rate of income tax (currently 22 per cent). Further details of the United Kingdom tax treatment of certain categories of shareholder while the Group is in the REIT regime are contained in next section.
United Kingdom Tax Treatment of Shareholders
After Entry into the REIT Regime
Introduction
The following paragraphs are intended as a general guide only [on dividends under the REITs regime] and are based on the Company’s understanding of current UK tax law and HMRC practice, each of which is subject to change, possibly with retrospective effect. They are not advice. As at the date of this document, HMRC’s detailed guidance on the REIT regime has not yet been finalised. This guidance could change the position described below.
The following paragraphs relate only to certain limited aspects of the United Kingdom taxation treatment of PIDs and Non-PID Dividends paid by the Company, and to disposals of shares in the Company, in each case after the Company becomes a REIT. They apply only to shareholders who are the absolute beneficial owners of both their shares in and dividends from the Company and hold their shares as investments and, except where otherwise indicated, they apply only to shareholders who are both resident and ordinarily resident for tax purposes solely in the United Kingdom. They do not apply to Substantial Shareholders, as defined in Part 4. Nor do they apply to certain categories of shareholders, such as dealers in securities or distributions, persons who have or are deemed to have acquired their shares by reason of their or another’s employment, persons who hold their shares by virtue of an interest in any partnership, collective investment schemes, insurance companies, life assurance companies, mutual companies, or Lloyds members. They apply to charities, trustees, pension scheme administrators or persons who hold their shares in connection with a UK branch, agency or permanent establishment only where indicated at paragraph B(iv)(d) below.
Shareholders who are in any doubt about their tax position, or who are subject to tax in a jurisdiction other than the United Kingdom, should consult their own appropriate independent professional adviser without delay, particularly concerning their tax liabilities on PIDs, whether they are entitled to claim any repayment of tax, and, if so, the procedure for doing so.
A. UK Taxation of Non-PID Dividends
Non-PID Dividends paid by the Company will be taxed in the same way as dividends paid by the Company prior to entry into the REIT regime, whether in the hands of individual or corporate shareholders and regardless of whether the shareholder is resident for tax purposes in the UK.
B. UK Taxation of PIDs
(i) UK taxation of shareholders who are individuals
Subject to certain exceptions, a PID will generally be treated in the hands of shareholders who are individuals as the profit of a single UK property business (as defined in section 264 of the Income Tax (Trading and Other Income) Act 2005). A PID is, together with any property income distribution from any other company to which Part 4 of the Finance Act 2006 applies, treated as a separate UK property business from any other UK property business (a different UK property business) carried on by the relevant shareholder. This means that any surplus expenses from a shareholder’s different UK property business cannot be off-set against a PID as part of a single calculation of the profits of the shareholder’s UK property business. No tax credit will be available in respect of PIDs.
Please see also paragraph B(iv) (Withholding tax), below.
(ii) UK taxation of corporate shareholders
Subject to certain exceptions, a PID will generally be treated in the hands of shareholders who are within the charge to corporation tax as profit of a Schedule A business (as defined in section 15 of ICTA). A PID is, together with any property income distribution from any other company to which Part 4 of the Finance Act 2006 applies, treated as a separate Schedule A business from any other Schedule A business (a different Schedule A business) carried on by the relevant shareholder. This means that any surplus expenses from a shareholder’s different Schedule A business cannot be off-set against a PID as part of a single calculation of the shareholder’s Schedule A profits.
Please see also paragraph B(iv) (Withholding tax) below.
(iii) UK taxation of shareholders who are not resident for tax purposes in the UK
Where a shareholder who is resident for tax purposes outside the UK receives a PID, the PID will generally be chargeable to UK income tax as profit of a UK property business and this tax will generally be collected by way of a withholding.
Please see also paragraph B(iv) (Withholding tax) below.
(iv) Withholding tax
(a) General
Subject to certain exceptions summarised at paragraph B(iv)(d) below, the Company is required to withhold tax at source at the basic rate (currently 22 per cent.) from its PIDs. The Company will provide shareholders with a certificate setting out the gross amount of the PID, the amount of tax withheld, and the net amount of the PID.
(b) Shareholders solely resident and ordinarily resident in the UK
Where tax has been withheld at source, shareholders who are individuals may, depending on their particular circumstances, either be liable to further tax on their PID at their applicable marginal rate, or be entitled to claim repayment of some or all of the tax withheld on their PID. Shareholders who are corporates will generally be liable to pay corporation tax on their PID (see paragraph B(ii) above) and if (exceptionally) income tax is withheld at source, the tax withheld can be set against their liability to corporation tax or income tax which they are required to withhold in the accounting period in which the PID is received.
(c) Shareholders who are not resident for tax purposes in the UK
It is not possible for a shareholder to make a claim under a double taxation treaty for a PID to be paid by the Company gross or at a reduced rate. The right of a shareholder to claim repayment of any part of the tax withheld from a PID will depend on the existence and terms of any double tax convention between the UK and the country in which the shareholder is resident.
(d) Exceptions to requirement to withhold income tax
Shareholders should note that in certain circumstances the Company must not withhold income tax at source from a PID. These include where the Company reasonably believes that the person beneficially entitled to the PID is a company resident for tax purposes in the UK or a charity or a company resident for tax purposes outside the UK with a permanent establishment in the UK which is required to bring the PID into account in computing its chargeable profits. They also include where the Company reasonably believes that the PID is paid to the scheme administrator of a registered pension scheme, the sub-scheme administrator of a certain pension sub-schemes, the account manager of an Individual Savings Account (ISA), the plan manager of a Personal Equity Plan (PEP), or the account provider for a child trust fund, in each case, provided the Company reasonably believes that the PID will be applied for the purposes of the relevant fund, scheme, account or plan.
In order to pay a PID without withholding tax, the Company will need to be satisfied that the shareholder
concerned is entitled to that treatment. For that purpose the Company will require such shareholders to submit a valid claim form (copies of which may be obtained on request from the Company’s registrars, Equiniti). Shareholders should note that the Company may seek recovery from shareholders if the statements made in their claim form are incorrect and the Company suffers tax as a result. The Company will, in some ircumstances, suffer tax if its reasonable belief as to the status of the shareholder turns out to have been mistaken.