UK REITs and Property Authorised Investment Funds (PAIFs) pay a special kind of dividend known as Property Income Distribution (PIDs).
The UK tax system treats PIDs as property letting income. Consequently they are taxed at higher rates than ordinary dividend income.
Just to complicate matters further, REITs and PAIFs may pay a combination of PIDs and ordinary dividends.
The fund should make it clear how much you receive of each type on your dividend voucher.
As with ordinary dividends, the tax you’ll pay on your PID income depends on:
- Whether you receive the income within a tax shelter (an ISA or a pension)
- Your personal income tax rate
As always buying your property investments within a tax shelter is the way to go if you have the spare capacity for them.
Note: Specialist property index trackers (such as the iShares ETF with the ticker IUKP) funds pay ordinary dividends not PIDs. That’s because they are not UK REITs or PAIFs. They may receive PIDs from UK REITs that they hold. But by the time the income reaches you as a shareholder in the tracker fund it’s a dividend.
Property Income Distributions within a tax shelter
You do not pay tax on PIDs held within tax-sheltered accounts.
However, unlike ordinary dividends that are paid gross (that is with no tax deducted), PIDs are generally paid with 20% tax deducted.
This means that the tax already paid needs to be clawed back.
Your tax-sheltered account should be issued with a 20% tax credit associated with your PID income.
The broker that runs your ISA or pension should use this to reclaim the tax paid from the taxman.
Notice we said “should”.
Twice!
Keep your eyes peeled to ensure your PID tax is being reclaimed by your broker. Sometimes they forget.
It can take four to six weeks after the PID is credited to your account for the reclaimed tax to turn up as cash.
PIDs outside of tax shelters
Are you holding your PAIF and receiving your PIDs outside of a shelter?
Sounds painful!
And tax-wise it is, compared to if you’d held it within an ISA or a SIPP.
You’ll need to work out what tax is due on your PIDs and other share income when you submit your annual self-assessment tax return. (Avoiding all the resultant tedious paperwork is reason enough to justify an ISA.)
The first thing to know is that PIDs do not benefit from the tax-free dividend allowance.
Most UK taxpayers must pay the standard rates of income tax on PIDs:
- 20% – basic rate
- 40% – higher rate
- 45% – additional rate
(Rates can vary if you’re a Scottish or Welsh taxpayer.)
You should receive your PIDs with a 20% withholding tax already deducted.
- Basic-rate taxpayers have nothing further to pay
- UK higher-rate payers owe HMRC another 20% of the gross amount
- Additional rate payers must cough up 25%
If the 20% deduction means you’ve overpaid tax then you can claim it back from HMRC.
This may apply for instance if your PID income falls within your personal allowance, or within a sub-20% income tax band.
Do not record your PIDs on your tax return as ordinary dividends. HMRC’s tax return notes offer further guidance.
Incidentally, non-resident shareholders may be able to claim back some of the withholding tax that’s pre-paid on UK REITs.
That’s possible if you live in a country that enables you to claim back a portion of withholding tax on UK securities. See this explainer from HMRC.
Is it correct that income / dividends from a property tracker (I.e I-shares global property tracker) is classed as ordinary share dividend, rather than PID, and therefore subject to normal dividend tax arrangements (£2000 tax free per annum)
@Nick — That’s correct. They may receive PIDs from UK REITs at the fund level, but as a shareholder you get dividends. It’s a good point to raise — I’ve added a line to clarify this in the article. Cheers!
Glad my hint got thru 😉
Thanks for the article, and as ever, the great website.
Thanks for this. I haven’t dared put my REIT that pays PIDs into my ISA, because I couldn’t face trying to persuade them to claim back the tax!
If anyone’s had any experience with the usual suspects e.g. iWeb, x-o/Jarvis, interactivebrokers, I’d love to hear it.
I’ve found that iWeb applies the correct tax-treatment in the ISA. You basically get two line items per distribution, one for 80% and the other for 20%.
Not tried it in the interactivebrokers ISA – I have my doubts though, because they won’t apply the correct treatment for my Ltd company account (they should be received gross there) – despite my asking, and pointing out the correct tax treatment.
w.r.t ETFs (like IUKP.L) You said “They may receive PIDs from UK REITs that they hold. ” But this misses out the crucial information – Do _they_ receive the PID gross or Net, before distributing it to you as dividends? i.e. If you hold the ETF in a taxable account are you effectively paying the tax twice?
Yes, that’s a good question that I’ve struggled to find an answer to when editing this piece, so thought perhaps I was being pernickety.
Let’s see if @TA knows?
Interesting tidbit on your Interactive Brokers ISA. (Also perhaps an article on running a limited company account on a broker (I presume this is special investing vehicle?) could make a good future article? Apologies for airing our publishing laundry out in public like this 😉 ).
The tax treatment of corporate shareholders depends on whether they’re UK domiciled or not.
ETFs will be foreign domiciled but funds may be UK based e.g. iShares Global Property Securities Equity Index Fund.
For a UK corporate shareholder:
Withholding tax is not deducted where a PID payment is made to a UK corporate shareholder, UK charity or a UK pension fund. A withholding tax of 20% is levied on PIDs to individual shareholders by the UK REIT.
But then:
Distributions relating to property rental business (PIDs) are treated as rental profits in the hands of the recipient. These are taxed at the corporation tax rate applying to that company, currently 19%.
Distributions of taxed profits (distributions out of the residual business) are likely to be tax-exempt in the hands of UK corporate shareholders.
But then in the prospectus for iShares Global Property Securities Equity Index Fund:
In respect only of income, authorised unit trusts are taxed as “investment companies” which means that franked income (dividends received from a UK resident company) is not taxed in the unit trust as it has been paid out of profits which have already been taxed.
(Don’t know if that applies specifically to a PID)
For a foreign corporate shareholder e.g. an ETF
A corporate or individual non-resident shareholder suffers a withholding tax of 20%. However, any tax suffered may be reclaimed if Treaty relief is available. The PID is only taxed as rental income in the UK. A refund of the withholding tax may be available under the terms of a relevant Tax Treaty, or if the recipient has Sovereign Immunity, the EU Parent-Subsidiary Directive is not applicable.
This is a good source:
https://prodapp.epra.com/media/EPRA_Global_REIT_Survey_2021_v5_1630572816126.0.pdf
I can’t find explicit references to PID treatment in index tracker literature more broadly.
Deffo worth an email to your individual fund provider to find out.
Cheers for that, Finumus!
“It can take four to six weeks after the PID is credited to your account for the reclaimed tax to turn up as cash.”
That’s nothing, you should try Interactive “Customers will receive all their tax back for the previous tax year around 5 months after the end of the tax year” Investor 🙂
But thanks for the very useful article that spurred me to check this out and put a note in my diary for September!
Just catching up on this one. Unlike Finimus, with a two line entry for PIDs, my iWeb ISA shows PIDs on only a single line, describing this as a gross dividend. I’ve assumed this is OK, but is it?!
On the SA form, the PIDs go into Other UK Income, as per the drop down notes.
Unhelpfully the notes for Property Income does not mention they aren’t counted as property income, nor which section they do go into.
Thanks for this article. What happens if you hold the REIT shares through a corporate entity? Example, you receive a PID income £100 dividend, £20 is taxed at source. Does the other 80% profit get taxed corporation tax in your annual return? Thanks so much
@londoninvestor: I have some REITs on II where I have the same thing held across both SIPP/ISA and unsheltered dealing account.
The SIPP & ISA holdings receive the full untaxed PID while the unsheltered holdings receive them net of the 20% withholding tax. e.g if the PID was 4p/share I’ll receive 4p/share in the ISA/SIPP and 3.2p/share in the dealing account. No waiting around for months for it to be reclaimed. I have heard some other platforms (I forget which) do make you wait though.
Looking into this business of taxation of ETFs holding PID payers…
IUKP (iShares UK Property UCITS ETF, Ireland domiciled) would seem to be one to be wary of in particular, or at least a good case-study to examine what’s going on.
On the face of it, it looks like an attractive easy one-stop-shop to hold – market-cap weighted – all the UK property companies (top holdings currently SGRO, LAND, BLND, BBOX, UTG…)
And indeed I see it’s included on Monevator’s “Low-cost index funds” page.
However, with its Ireland domicile it may not be particularly tax efficient for UK PIs…
If I look in IUKP’s annual reports, there seem to be two numbers relevant to PIDs and taxation:
– “dividend income”
– “Non-reclaimable overseas income withholding tax”
Looking back over a few years and expressing the withheld tax (bracketed number) as a proportion of the divis (first number after the year):
2021: 17950 (3630) 20%
2020: 18518 (1865) 10%
2019: 26548 (2694) 10%
2018: 29547 (3085) 10%
2017: 32594 (3309) 10%
(and no annual reports available before that)
The 2021 step up presumably illustrates the impact of the ~2020 clampdown to stop foreign investors in UK property spiriting the income away to tax-free jurisdictions.
I note the index tracked does appear to be net of 20% withholding tax (at least by my reading of a FTSE Russell document on the topic), and IUKP does generally still beat that before costs thanks to securities lending income (e.g in 2021 the benchmark did 37.4%. IUKP’s OCF is 0.4% so 37.0% might have been the expected return… but IUKP actually managed 37.28%).
But still, PIs holding SGRO, LAND, BLND, BBOX, UTG etc directly in a SIPP/ISA instead of IUKP there could seem to expect to be better off by having their PIDs received tax free (or having their platform reclaim them later – treatment seems to vary).
It’s a bit of shame there isn’t – AFAIK – a UK domiciled fund doing similar to IUKP but able to reclaim/avoid tax on PIDs. (iShares Global Property Securities Equity Index Fund is UK domiciled and passive, but global in scope. TRY is UK domiciled but quite active and includes Europe. Gravis UK Listed Property is UK domiciled and focussed, but quite active with some opinionated sector tilts.) Maybe one will appear in time.
On the other hand, IUKP isn’t particularly yieldy: ~2.5% (the 5%+ yield monster REITs might get fussed over by income seekers and the financial journalists pandering to them, but not every holding is like that). Someone with £10K in it might be getting £250pa in divis instead of the £300pa they might from a more tax-efficient efficient way of holding the same underlying PID producers. But it’d probably need a lot more than £50 in trading fees to marshall anything remotely similar to IUKP together “by hand”. That might look different to someone with £100K to splash on UK property though.
Hi.
Another very interesting and informative article!
One question/thought, will the proposed reduction in the basic Income Tax to 19% in April 2024 impact the 20% taken on PID?
The Spring 2022 Statement says;
“The cut will apply to the basic rate which applies to non-savings, non-dividend income for taxpayers in England, Wales and Northern Ireland; the savings basic rate which applies to savings income for taxpayers across the UK”
So tax on savings and dividend income isn’t included, but PIDs aren’t mentioned. Would it be safe to assume that because they aren’t excluded, it means they are included? And so they will get the 19%?