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How Property Income Distributions (PIDs) are taxed

PID income is taxed at a different rate to ordinary dividend income

Since most large commercial property companies in the UK such as Land Securities and British Land have converted into Real Estate Investment Trusts (REITs), many UK investors are receiving Property Income Distributions (PIDs).

PIDs are a special kind of dividend, related to a property company’s REIT status, which enables the REIT to pay out most of its rental income without it being taxed twice by the Government.

PIDs are treated by the UK tax system as property letting income, not as the ordinary dividend income we looked at previously.

Not all property companies have chosen to become REITs – some may still be paying ordinary dividends.

Also, property companies may pay a combination of PIDs and ordinary dividends, just to complicate matters.

As with ordinary dividends, the tax you’ll pay on your PID income depends on whether you receive the income within a tax shelter (i.e. an ISA, CTF or pension), and also on your personal income tax rate.

PIDs within a tax shelter

You do not pay tax on PIDs held within tax sheltered accounts.

However, unlike ordinary dividends that are paid gross (i.e. with no tax deducted), PIDs are generally paid with 20% tax deducted.

This means 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, which the company that runs your ISA, CTF or pension should use to reclaim the tax paid from the taxman.

Do watch to ensure your PID tax is being reclaimed by your broker, as sometimes they forget. It can take 4-6 weeks after the PID is credited to your account for the reclaimed tax to turn up as cash.

I’ve heard that brokers can ask for PIDs to be paid gross to shareholdings in tax shelters, but I’ve no knowledge as to how widely this is being done.

PIDs outside of tax shelters

You’ll work out what tax is due on your PIDs and other share income when you submit your annual self-assessment tax return. (Avoiding the resultant tedious paperwork is reason enough to justify an ISA!)

PIDs are paid net of 20% tax, as mentioned, and with a 20% tax credit associated with the PID payment.

But unlike the ‘notional’ tax credit we saw with ordinary shares, the PID tax credit is a ‘real’ tax credit, representing money that has actually been transferred as tax to the Inland Revenue.

PIDs are taxed at letting income rates:

  • Basic rate tax-payers – 20% tax due on PIDs
  • Higher rate tax-payers – 40% tax due on PIDs

PID income that is taxed at the basic 20% rate incurs no further tax charge, since the PID was paid Net of the 20% tax that’s due.

If your PID income is to be taxed at the 40% rate, you have more tax to pay. You’ll therefore pay another 25% tax on the PID income you receive (representing another 20% on the original gross PID income, i.e. before 20% tax was deducted).

If your income is such that your PIDs aren’t liable to be taxed at all, you can use the PID tax credit to pay other income tax that’s due, or else reclaim the tax paid from the Inland Revenue as cash.

{ 3 comments… add one }
  • 1 Faustus November 14, 2009, 12:44 am

    This is really helpful – and brings up the question of which assets should be used in an ISA shelter and which (once the limit has been used up) should remain outside.

    Presumably, given the tax regime, a scale of priority may look like the following for a taxpayer if one focuses on income (with most advantageous to keep in an ISA at top):

    Shares for Growth (expecting high capital gains)
    Shares for Income (expecting high dividend income)
    ETF Index Trackers
    Unit Trusts/OEIC Funds

    Of course, the distribution is different if one were to focus on sheltering from capital gains, but I assume many readers will be building a fund for future income rather than intending to sell off large swathes of capital.

  • 2 The Investor November 15, 2009, 11:13 am

    That looks about right to me Faustus, good comment.

    Cash should be near the top in theory, too, especially as CGT isn’t a problem for most people. I’ll probably do a post on this at some time!

  • 3 Bence June 13, 2012, 9:34 am

    DB X-trackers has 3 REIT ETFs which don’t distribute dividends, for example the FTSE EPRA/NAREIT GLOBAL REAL ESTATE ETF (ISIN: LU0489337005).

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