IFM22105 - Real Estate Investment Trust : Conditions and Tests: maximum shareholding: definitions

If the UK-REIT company (principal company in the case of a Group REIT) makes a property income distribution to or in respect of the holder of excessive rights (HoER) that is not an excluded holder without taking reasonable steps to avoid this, a tax charge is imposed on the UK-REIT company. The charge can be triggered only when such payment is made, where a PID is paid to, or in respect of, an excessive shareholding. The existence of such a holding by itself is not sufficient to trigger a charge.

Definitions:

Holder of excessive rights (HoER)

This is defined in CTA2010/S553 as a company or a person treated as body corporate for tax purposes in accordance with the law of a territory with which the UK has entered into a DTA or in accordance with an international agreement for double taxation, which:

·       is beneficially entitled, directly or indirectly, to 10% or more of the UK-REIT company's distributions; or

·       is beneficially entitled, directly or indirectly, to 10% or more of the UK-REIT company's share capital; or

·       controls, directly or indirectly, 10% or more of the voting rights of the UK-REIT company.

For examples of interpretation, see IFM22106.

‘Excluded holder’: CTA10/S553(4)

A HoER is an ‘excluded holder’ if, either:

  • Under double taxation arrangements, the HoER is taxed at a particular rate, or not taxed at all (0% rate) on distributions from a UK-REIT – unless the reason for that treaty rate is solely the size of the holder’s interest in the UK-REIT (applies from 22 February 2024). An investor will not be an excluded holder under this rule if there is no double taxation arrangement with their jurisdiction or if they are not entitled to benefits under the double taxation arrangement with their jurisdiction.

Or

  • A PID is paid gross to the HoER in accordance with Regulation 7 of the Real Estate Investment Trusts (Assessment and Recovery of Tax) Regulations 2006 – Gross Payment of Distributions (see IFM28125) (applies from 1 April 2022 onwards). Finance Act 2022 introduced the exclusion of HoERs entitled to gross payments of PID within CTA10/S553(1). This was subsequently moved to CTA10/S553(4A)(b) by Finance Act 2024, which introduced a definition of an ‘excluded holder’.

Where a distribution is made to a HoER that is an excluded holder, no HoER charge under CTA10/S551(3) will arise. See IFM22106 for examples of excluded holders.

 ‘Company’

The term ‘company’ is defined in TCGA1992/S170(9) (CTA2010/S609) and includes:

·       a company as defined in section 1(1) of the Companies Act 2006

·       a company (other than a limited liability partnership) which is constituted under any other Act or a Royal Charter or letters patent or is formed under the law of a country or territory outside the United Kingdom

·       a registered society (see CTA2010/S1119)

·       an incorporated friendly society within the meaning of the Friendly Societies Act 1992

·       a building society.

Other terms are not defined specifically for the purpose of the maximum shareholding rule.  As the provision was introduced in the context of double tax treaties, HMRC will interpret words consistently with their DTA meanings. Some examples are set out below.

Sovereign immune entities

A sovereign immune entity is immune from UK direct taxes and is therefore entitled to reclaim the full amount of withholding tax irrespective of whether there is a DTA or whether it is a company or body corporate. It follows that the policy objective described above does not apply to sovereign immune entities and they should not come within the HoER rules.

‘Beneficially entitled’

The usual meaning of beneficially entitled will generally apply – that is, the person who receives the dividend and has no legal obligation to pass it on to another person.

‘Controls’

None of the Taxes Acts definitions of control is directly applicable here.  This is because those definitions apply only for specified purposes and are generally defined in the context of controlling a company, rather than controlling voting rights in the company.  In this context, someone controls the voting rights if they have the power to check, restrain or govern how the votes are used.

Because the normal Taxes Acts definitions of control are not picked up, the meaning here does not therefore pick up the concept of associated and connected persons that applies as part of CTA2010/Part 10 for 'close' company purposes.  Nor does it pick up control as a result of entitlements to acquire rights in the future.  The meaning is more akin to the concepts in section CTA2010/S1124 of effective power to control.           

Indirect control of voting rights

This might exist where shares in C (a REIT) are held by an intermediate entity, such as a subsidiary or a trust, over which A has control – and can therefore, as a result of that control, direct how the intermediary exercises its voting rights in C. See Example 2 in IFM22106.  

Distributions

Any references made to distributions include share capital issued in lieu of a cash dividend.