SAIM5330 - Dividends and other company distributions: UK Real Estate Investment Trusts: taxation of distributions

Taxation of Property Income Distributions

The PID is generally taxable as profits of a UK property business. The amount that is chargeable to tax is the full amount of the PID – that is, the amount of cash received plus the amount shown as deducted on the voucher that accompanies the distribution. If the shareholder holds 100 shares and the company that is a UK-REIT declares a distribution of £1 per share, payable as a PID, the company pays £78 to the shareholder and pays over £22 to HMRC. The amount chargeable on the shareholder would be £100, made up of £78 cash paid and £22 tax deducted.

Income from UK property is chargeable to tax at 10% for starting rate tax payers, at 22% for basic rate tax payers, and at 40% for higher rate taxpayers.

The exception to the property income rule is for members of Lloyd’s and financial traders, for whom the PID is a receipt of their trade.

Basic rate taxpayers

Basic rate taxpayers have no further tax to pay on the PID, as the tax bill is met in full by the tax deducted on payment. Receiving a PID does not mean a basic rate taxpayer has to complete a Self Assessment return if they would not need to do so otherwise.

Individuals not liable to income tax

Investors who are not liable to tax on income can claim repayment of all the tax shown as deducted on the voucher attached to the PID, by completing a claim form R40 in the normal way.

Starting rate taxpayers

Starting rate taxpayers may claim repayment of the difference between the tax deducted and the tax due from them on the PID. For 2006-07, a starting rate taxpayer is an individual with taxable income (after personal allowances) of less than £2,150. For example, if they receive £78 cash and a voucher showing £22 tax deducted from a UK REIT, they can reclaim £12. This is the difference between the £22 shown on the voucher and £10, the amount of tax due on the PID. The amount can be reclaimed by using form R40, or as part of their Self Assessment if they have been sent a tax return for the year.

Higher rate taxpayers

Higher rate taxpayers will pay an additional amount of tax on their PID. If they receive £78 cash and a voucher showing £22 tax deducted from a UK-REIT, the amount of income brought into charge is £100, the tax due in respect of the PID is £40 (£100 at 40%). The £22 tax shown as deducted is offset against £40 due, leaving £18 to pay. This can either be collected via the PAYE tax code, or included on their ITSA return.

Higher rate taxpayers who do not normally complete a tax return need to inform their tax office when they receive PID so their tax codes can be adjusted to collect the additional tax. Unless the amount of income from the UK-REIT is large, a higher rate taxpayer would not be sent a tax return just because they were receiving PID.

Taxation of other dividends from a UK-REIT

Dividends paid by a UK-REIT that are out of their profits arising from other activities are treated in the same way as any other UK company dividend for tax purposes. They are paid with a non-repayable 1/9th tax credit attached. For example, if the UK-REIT pays a normal dividend of £90, the tax credit is £10. This tax credit meets the tax bill for starting rate and basic rate taxpayers.

Non-taxpayers cannot claim payment of the 1/9th tax credit. Higher rate taxpayers are chargeable at the dividend upper rate of 32.5% on the cash paid plus 1/9th tax credit (£90 + £10 in the example), and can off-set the 1/9th tax credit against their tax due on the dividend (leaving £22.50 to pay on £90 dividend received).