GREIT09150 - Miscellaneous: manufactured payments: background

Manufactured payments arise where, under a contract or other arrangement for the transfer of securities, one party is required to pay to the other an amount representative of interest or a dividend on those securities. They normally arise under repos or stock loans where the transaction crosses an interest or dividend date. The temporary holder (the dividend manufacturer) makes a payment (a manufactured payment) to the transferor as compensation for the dividends or interest the transferor would have received in the absence of the repo or stock loan. Manufactured payments may also arise where a person sells securities cum dividend but delivers ex dividend stock.

There are special rules in Schedule 23A ICTA that seek to treat the payer and recipient of the manufactured dividend in broadly the same way for tax purposes as though the payment had been of an actual dividend.

Distributions out of the tax-exempt income of a UK-REIT are treated as income from UK property, and paid under deduction of basic rate tax. If these property income dividends (PIDs) were part of manufactured payment arrangements, the existing rules in Schedule 23A would treat the manufactured PIDs as ordinary company dividends. There are therefore special provisions in the UK-REIT legislation to treat the payer and recipient of manufactured PIDs in the same way for tax purposes as if the payment had been an actual PID.

For manufactured dividends that represent the distribution of profits other than those of the tax-exempt business, the normal rules for manufactured dividends in Schedule 23A ICTA apply (see CFM17300). This includes any dividend paid by a subsidiary of a Group REIT to the principal company or intermediate holding company.