GREIT02123 - Conditions and Tests: maximum shareholding: formula to work out notional income (regulation 10(2) SI 2006/2864)
The formula as set out in regulation 10(2) SI 2006/2864 is:
| DO x SO x BRT | + | DP x SP x BRT | ||
| MCT | MCT |
where:
- DO is total amount of the profits of C (tax-exempt) distributed by the company in respect of its OSC
- SO is the lesser of the percentage of rights
- in respect of the company’s OSC held by the HoER, and
- held by the recipient of the distribution
- BRT is basic rate of income tax in force when the distribution was made
- MCT is main rate of CT applicable to the company (principal company in the case of Group REIT) (regulation 1(2) SI 2006/2864)
- DP is total amount of profits of C (tax-exempt) distributed by the company in respect of its preference share capital, and
- SP is the lesser of the percentage of rights
- in respect of the company’s preference share capital held by the HoER, and
- held by the recipient of the distribution.
DO x SO is the amount of dividend on OSC paid to the excessive
shareholder. Multiplying that by BRT calculates the amount of
income tax that the company would deduct from that dividend.
Dividing by MCT takes account of the fact that the notional income
will be chargeable at MCT. This results in a tax charge of the
amount of basic rate tax that could potentially be reclaimed in
whole or in part under a DTA by the recipient of the dividend.
The second part of the formula makes the same calculation in
respect of dividends paid on preference shares.
Example
Company C is a UK-REIT with 100,000 ordinary shares in issue and
no preference shares. Its accounting date is 31 December. Basic
rate for income tax is 22% and the main CT rate is 30%.
Company A owns 12,000 shares in C. C declares a dividend of
10p per share and pays it on 15 February 2010. A sells its rights
to dividends on 4,000 of those shares to an individual and receives
the dividend on the remaining 8,000.
A is a HoER because they control 12% of the voting rights and
own 12% of the shares in C. A’s beneficial entitlement to
dividends is to 8% (= 8,000/100,000).
DO is 10,000 (= 10p x 100,000). A’s beneficial
entitlement to dividend is lower than the percentage of the other
rights they hold in C, so SO is 8%.
The notional income arising to C (residual) in accounting
period ending 31 December 2010 is therefore 10,000 x 8% x 22%/30% =
586.67. The amount of CT due is 176 (which is 22% of the 800
dividend payable to A).
