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 [1].
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 [2] 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 [3] 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 [4] from HMRC.