UK REITs and Property Authorized Investment Funds (PAIFs) pay a special sort of dividend called Property income distribution (PIDs).
The UK tax system treats PIDs as property rental income. As a result, they’re taxed at higher rates than atypical dividend income.
To complicate matters further, REITs and PAIFs pays a mix of PIDs and atypical dividends.
The fund should make it clear in your dividend voucher how much of every type you’ll receive.
As with atypical dividends, the tax you pay in your PID income depends upon:
- Whether you receive the income as a part of a tax relief (an ISA or a pension)
- Your personal income tax rate
As all the time, purchasing your real estate investments inside a tax authority is the solution to go if you’ve the capability to achieve this.
Note: specialist Real estate index tracker (e.g. the iShares ETF with the abbreviation IUKP) fund pay normal dividends, no PIDs. This is because they should not UK REITs or PAIFs. You may receive PIDs from UK REITs that hold them. But when the returns reach you as a shareholder of the tracker fund, it’s a dividend.
Property income distributions inside a tax authority
You pay no taxes on PIDs held in tax-deferred accounts.
However, unlike atypical dividends, that are paid gross (i.e. without tax deduction), PIDs are generally paid with a 20% tax deduction.
This implies that the Taxes which have already been paid have to be reclaimed.
Your tax-deferred account should include a 20% tax credit related to your PID income.
The broker who manages your ISA or pension should use this to reclaim the tax paid from the tax office.
Notice we said.
Twice!
Keep your eyes peeled to make sure your PID tax is claimed back by your broker. Sometimes they forget it.
Once the PID is credited to your account, it could take 4 to 6 weeks for the reclaimed tax to look as money.
PIDs outside tax havens
Do you hold your PAIF and receive your PIDs outside of a shelter?
Sounds painful!
And for tax purposes it’s, in comparison with when you had held it as a part of an ISA or SIPP.
When you file your annual self-assessment tax return, you will have to seek out out what taxes apply to your PIDs and other stock income. (Avoiding the tedious paperwork involved is reason enough to justify an ISA.)
The very first thing it is advisable to know is the PIDs not Benefit from the tax-free dividend allowance.
Most UK taxpayers must pay the usual rates of income tax on PIDs:
- 20% – basic tariff (22% from April 6, 2027)
- 40% – higher rate (42% from April 6, 2027)
- 45% – additional rate (47% from April 6, 2027)
(Rates may vary when you are a Scottish or Welsh taxpayer.)
You should receive your PIDs with the 20% withholding tax already deducted.
- The property taxpayer has nothing more to pay
- Higher rate taxpayers within the UK will owe HMRC an additional 20% of the gross amount
- Additional rate payers must pay 25%
If the 20% deduction means you’ve paid an excessive amount of tax, you may claim this back from HMRC.
This would be the case, for instance, in case your PID income is inside your personal allowance or inside an income tax band of lower than 20%.
Do not report your PIDs as regular dividends in your tax return. Further guidance might be present in HMRC’s tax return guidance.
Furthermore, non-resident shareholders may have the option to say back among the withholding tax paid upfront on UK REITs.
This is feasible when you live in a rustic where you may reclaim among the withholding tax on UK securities. Look at this Explainer from HMRC.
