How does section 142A of TCGA 1992 treat stock dividends issued by a UK REIT?

Section 142A disapplies the normal share capital reorganisation rules for REIT stock dividends. When a UK REIT issues shares in lieu of a cash dividend attributed to its property rental business, residual business, or tax-exempt gains, the new shares are treated as a separate acquisition rather than being merged with the investor's existing shareholding.

What is the base cost of new shares received as a REIT stock dividend under section 142A?

The base cost of new shares received as a REIT stock dividend is set at the cash equivalent of the share capital issued. This means the acquisition cost equals the amount of cash dividend the shareholder chose to forgo in exchange for receiving shares, rather than the market value of the shares at the time of issue.

Why are REIT stock dividends not treated as a reorganisation of share capital?

REIT distributions have a special tax character and can be attributed to different parts of the REIT's business, such as property rental, residual business, or tax-exempt gains. The normal capital gains reorganisation rules do not work properly for these distributions, so section 142A provides bespoke treatment by disapplying reorganisation treatment entirely.

How is a chargeable gain calculated when selling shares acquired through a REIT stock dividend?

When selling shares acquired through a REIT stock dividend, the chargeable gain is calculated by deducting the cash equivalent base cost and any incidental costs of disposal from the sale proceeds. The new shares are not pooled with the original REIT shareholding, so the original holding remains unaffected for capital gains purposes.

Taxation of Chargeable Gains Act 1992 section 142A

REITs: chargeable gains on stock dividends

Section 142A sets out the capital gains tax treatment that applies when a UK Real Estate Investment Trust (REIT) issues shares to its investors instead of paying a cash dividend — commonly known as a stock dividend or scrip dividend.

When a UK REIT (whether a single company or the principal company of a group REIT) issues shares in place of a cash dividend, and the distribution is attributed to the REIT's property rental business, residual business, or tax-exempt gains, special capital gains rules apply.
The issue of shares in lieu of cash is not treated as a reorganisation of share capital, meaning the normal rules that treat new shares as the same asset as the original holding do not apply — the new shares are treated as a separate acquisition.
The base cost of the new shares for capital gains purposes is set at the cash equivalent of the share capital issued, rather than market value — this is the amount of the cash dividend the shareholder gave up in order to receive shares instead.
The definitions of "share capital issued in lieu of a cash dividend" and "cash equivalent of share capital" follow the income tax rules for stock dividends, and the terms "company UK REIT" and "principal company of a group UK REIT" take their meaning from the REIT legislation in the Corporation Tax Act 2010.

Access full legislation.And much more.

By becoming a member, your team gets full access to Tax World research tools and source-backed tax resources.

Become a member