IFM22123 - Real Estate Investment Trust : Conditions and Tests: maximum shareholding: formula to work out notional income: CTA2010/S552
Source: gov.uk (2025-04-17)


Where the company (or principal company of a Group REIT) has paid out a distribution to, or in respect of a holder of excessive rights (HoER) that is not an excluded holder, a tax charge is imposed on the company. The method for calculating the notional income is as follows (CTA2010/S552):

Step 1 Calculate DO x SO x (BRT/MCT)

where:

DO is the amount of the company’s profits from its property rental business or (in relation to a Group REIT) the group’s UK profits (as defined by CTA2010/S530(2)) that have been distributed by the company or the principal company of the Group REIT in respect of its ordinary shares. This does not include gains.

SO is the lesser of the percentage of rights:
- in respect of the company’s ordinary shares held by the HoER, and
- held by the recipient of the distribution
in respect of which a distribution is made.

BRT is the basic rate of income tax in force when the distribution is made.

MCT is the main rate of CT applicable to the company (principal company in the case of Group REIT).

Step 2 Calculate DP x SP x (BRT/MCT)

DP is the amount of the company’s property rental business profits or (in relation to a Group REIT) the group’s UK profits (as defined by CTA2010/S530(2)) that have been distributed by the company or the principal company of the Group REIT in respect of its preference share capital. This does not include gains.

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
in respect of which a distribution is made.

Step 3 Add together the amounts given by steps 1 and 2

The result is the notional income (defined in the legislation as the section 552 amount).

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 on the notional income 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 distribution.

The second part of the formula makes the same calculation in respect of distributions paid on preference shares.

The charge under CTA2010/S552 refers only to UK profits of the property rental business; it does not include distributions from property rental business gains.

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 of income tax is 20% and the main CT rate is 25%.

Company A owns 12,000 shares in C. C declares a dividend of 10p per share and pays it on 15 February 2024. 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 it controls 12% of the voting rights and is beneficially entitled to 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 dividends is lower than the percentage of the other rights it holds in C, so SO is 8%.

The notional income arising to C (residual) in accounting period ending 31 December 2024 is therefore 10,000 x 8% x 20%/25% = 640. The amount of CT due is £640 x 25% = 160 (which is 20% of the 800 dividend payable to A).