IFM28220 - Real Estate Investment Trust : Distributions: manufactured payments: deduction of tax
Source: gov.uk (2025-04-17)


Obligation to deduct income tax on payment of an MPID

Regulations made under ITA2007/S973 and S974 (SI 2006/2867) require a company that pays a distribution out of tax-exempt property rental business profits (a PID) to deduct income tax at the basic rate and account for it to HMRC (see IFM28060 (https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm28060)). The same regulations apply to payment of an MPID by a payer that is either UK resident or a UK permanent establishment, and apply regardless of whether or not the payer of the MPID is a company (ITA07/S918).

There will only be an obligation to deduct income tax from an MPID where the recipient of that MPID would normally receive an actual PID under deduction of tax.

The only exception to this obligation is where the MPID is paid other than in connection with an activity that is subject to UK tax, that is, where the MPID is paid by a UK resident company in the course of a trade carried on through a permanent establishment in a territory outside the UK and the exemption in CTA09/S18A has effect for the accounting period in which it is paid (ITA07/S918(3A)).

Rate of withholding tax from MPID

The rate of withholding tax in relation to an MPID will be exactly the same as would have applied if the real PID of which the MPID is representative were paid directly by the UK-REIT to the recipient of the MPID. Where that rate is nil (for example, because the MPID is paid to a UK company and therefore withholding tax does not need to be deducted,) then the MPID will also be paid to that recipient without deduction of tax.

PIDs where rights to the distribution have been transferred or sold

Under SI2006/2867/reg7(7), PIDs are always paid under deduction of basic rate tax where the rights to the distribution have been transferred or sold, without selling the underlying shares. This is regardless of the nature of the person beneficially entitled to the PID.

Non-resident recipients of an MPID

Where a non-UK resident enters into a stock loan of shares in a UK-REIT with a UK resident or a UK permanent establishment of a non-UK resident, any MPIDs they receive from that UK resident or permanent establishment under the stock loan will be paid to them with withholding tax deducted.

The non-resident recipient may claim a repayment of tax under treaty provisions in respect of the MPID in the same way as they would for an actual PID paid to them with withholding tax deducted.

An MPID may be generated where a person holding 10% or more of the shares in a UK REIT loans some of their shares to another person as a reasonable step to prevent a distribution being made to a holder of excessive rights (HoER) (see IFM22140 (https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm22140)). In this situation, the UK-REIT shares retained by the investor and the REIT-shares loaned under the stock loan are not aggregated for the purposes of identifying how any treaty provisions should apply. This means that the transferor, or lender, of the shares would not have access to any special treaty rates for≥10% shareholders in respect of any PID paid on the shares they retain (see example below).

Example

Non-UK resident X holds 12% of the shares in UK-REIT. Under the terms of the relevant treaty with the UK, X would, as a ≥10% shareholder, be subject to a reduced treaty rate of 5%. If a PID of 100 was paid, with 20 of withholding tax deducted, X would be able to claim a repayment of 15, thus reducing the tax paid to 5.

If, however, X held less than 10% of the shares, and under the terms of relevant treaty the tax rate for dividends is 15%, they would only be able to claim a repayment of the tax withheld in excess of that 15%. Using the same figures as above, X would be able to claim a repayment of 5, reducing the tax paid to 15.

As the payment of a PID for the 12% shareholding would attract a holders of excessive rights charge for UK-REIT, X arranges a stock loan to prevent receipt of the full amount of the PID.

X enters into a stock lending arrangement with Y, who borrows a 2.1% shareholding. X is left with 9.9% of the shares in the UK REIT.

When UK-REIT pays a PID, Y receives that PID in respect of the 2.1% it holds and X receives a PID relating to the 9.9% they retained, both being paid after tax is deducted. Under the terms of their stock lending agreement, Y makes a manufactured payment (MPID) to X equal to the value of the PID it received on the 2.1% shares. Y deducts withholding tax from the MPID it pays as required by regulations (SI2006/2867).

X can make a treaty repayment claim for double taxation relief in respect of both the PID (on their 9.9% shareholding) and the MPID (on the 2.1% shareholding transferred to Y under the stock loan). X is eligible for relief on both at the normal treaty rate (15%), and not the rate for larger holdings that they would have received when they had full ownership of 12% of the UK-REIT shares prior to the stock loan. In this example, X would be able to claim a repayment of 5% withholding tax on both the PID and the MPID, reducing the effective withholding rate to 15%.