Taxing non-UK resident investors in UK property


In the Autumn Budget 2017, the UK government announced substantial changes to the taxation of capital gains made by non-UK residents investing directly or indirectly in UK property.

From April 2019, non-UK resident property owners will pay UK tax on any gains made on the disposal of:

  • all commercial and residential property (direct disposals); and
  • shares in “property-rich” companies (broadly, companies that derive 75 percent or more of their gross asset value from UK property) where the seller owns (or has owned) 25 percent or more of the shares (indirect disposals).

A special regime will apply to collective investment vehicles (see below). In addition, the ATED-related capital gains tax will be abolished.

What is the current position?

Non-UK resident property owners only pay UK tax on gains made on certain direct disposals of residential property.

No UK tax is payable by non-UK residents on gains made on direct disposals of commercial property, nor on disposals of “property-rich” companies.

Separate rules already impose UK tax on non-UK resident property traders.

When will these changes take effect?

The new rules will apply to disposals taking place from April 6, 2019.

However, property and interests in vehicles will be “rebased” in April 2019, so that where capital gains tax does not already apply, only gains accruing after this date will be subject to tax. However, it is possible to use the original acquisition cost to calculate the gain if that would produce a fairer result (although this cannot produce an allowable loss on an indirect disposal).

Why are these changes being made?

The government wants to align the tax treatment of UK and non-UK resident investors and to discourage the creation of complex offshore structures to hold UK property, which the government believes can facilitate tax avoidance.

In many ways, the UK is simply catching up with comparable jurisdictions, many of which already tax direct and indirect disposals in this way.

What is the treatment of direct disposals?

Any direct disposal of UK property — whether residential or commercial — by a non-UK resident investor will potentially be subject to UK tax.

What is the treatment of indirect disposals?

Investors that own or have, in the previous two years, owned 25 percent of the shares in “property-rich” companies will be subject to UK tax on a disposal of those shares, though any shareholding that only temporarily exceeded 25 percent can be ignored if it was held for an insignificant time. In determining whether an investor holds 25 percent of the shares, shares held by certain connected persons are aggregated.

Importantly, no tax is payable on disposals of “property-rich” companies where the property is used to carry on trading activities. This could potentially mean that companies that operate as retailers, hotel-operators or self-storage operators fall outside the new charge.

Are there any exemptions?

Other than the trading company exemption referred to above, there are no specific reliefs or exemptions that will apply to the new rules.

However, any person that is not subject to UK tax for reasons other than their residence (such as charities, sovereign wealth funds and pension schemes) will continue to be exempt.

Furthermore, existing reliefs and exemptions will apply as they do for UK tax residents. This would include the no gain/no loss intragroup transfer provisions and the substantial shareholdings exemption that may assist “qualifying institutional investors” making indirect disposals.

It is also worth noting that treaty relief may be available to investors making an indirect disposal. Certain treaties (notably Luxembourg) do not currently allow the UK to tax indirect disposals. However, the UK is seeking to renegotiate these treaties (and is in the process of renegotiating the Luxembourg treaty) so this benefit may not last long. Furthermore, the new rules contain an anti-avoidance rule which prevents investors from “treaty shopping” to take advantage of favorable treaties.

What is the special regime for collective investment vehicles?

The special regime for collective investment vehicles (CIVs) will apply to collective investment schemes, AIFs, REITs and non-UK resident companies that are equivalent to REITs.

By default, offshore CIVs will be treated as companies and their investors will be treated as holding shares. Consequently, offshore CIVs will be subject to UK corporation tax on any gains made on the disposal of UK property, and disposals of interests in offshore CIVs by investors will also be subject to UK tax.

This could potentially add layers of direct tax, without the CIV being able to benefit from any exemptions of the investors. However, the legislation offers two (optional) elections allowing (a) tax transparency and/or (b) an exemption, if certain conditions are met, to mitigate the effects of the new rules (see below).

This treatment does not apply to offshore CIVs that are partnerships, which will continue to be transparent for tax purposes.

Non-resident investors in onshore or offshore CIVs will not benefit from the 25 percent threshold that applies to other investors selling shares in “property-rich” companies, so these investors will be subject to UK tax regardless of the extent of interest they hold in the CIV. Investors that are exempt from UK tax for reasons unrelated to tax residence will continue to be exempt.

What is the transparency election?

Offshore CIVs that are transparent for income tax purposes (such as JPUTs) can make an irrevocable election to be treated as a partnership for capital gains purposes, and therefore be transparent for capital gains too. Consequently, the CIV will not be subject to tax under the new rules, but the investors will be subject to tax on any gains made on the disposal of UK property by the CIV.

It is expected that this election will be most suitable for smaller, joint-venture arrangements where the investors are predominantly or wholly exempt from UK tax. It is likely to be unsuitable for CIVs that have regular changes of investors, as these changes may trigger regular disposals of other investors’ interests in the underlying assets, giving rise to dry tax charges. The election effectively places the investors in the same position as they would have been in had they invested directly in the UK property, although the election has no impact on other taxes (such as SDLT).

What is the exemption election?

CIVs (and companies that are not CIVs) that meet certain conditions may make an exemption election so that they are exempt from tax on gains made on direct or indirect disposals of UK property, but their investors are instead subject to tax on a disposal of an interest in the CIV. This election will mean that the CIV is treated in a similar way to a REIT.

The conditions for, and implications of, making an exemption election are complex. Broadly speaking, an offshore CIV that is a “property-rich” company (or treated as one by the new rules) may make the election if it is one of the following:

  • a collective investment scheme, and interests in the scheme are marketed and made available to sufficiently wide categories of investor;
  • a “non-close” company with shares traded on a recognized stock exchange; or
  • a “non-close” CIV and the CIV’s manager reasonably believes that, should all of the assets of the CIV be liquidated and the proceeds returned to investors, no more than 25 percent would not be subject to UK tax because of the allocation of taxing rights under tax treaties.

The election must be accompanied by information about disposals made by investors in the two years prior to the making of the election.

If, after the election is made, the CIV fails to meet the conditions set out above, it will trigger a deemed disposal and reacquisition of the investors’ interests in the CIV. In some circumstances, any resultant gains will be subject to tax immediately, whilst in others the tax charge may be delayed.

The election applies to the CIV and any entities in which the CIV has at least a 40 percent interest, and it continues to have effect provided that the CIV provides certain information about the CIV, its investors and entities in the CIV’s structure to HMRC on an annual basis.

The election can be revoked by the CIV’s manager, or by HMRC if the CIV has not complied with its information obligations to HMRC, or if HMRC considers it appropriate to safeguard the public revenue.

It is expected that this election will be most suitable for widely held funds with large structures, particularly where the investors are exempt and wish to prevent tax charges in the fund that will impact on their returns. It is likely to be unsuitable for smaller, joint-venture arrangements.

Are there any changes to the REIT regime?

Yes. In particular, REITs will no longer be taxed on disposals of “property-rich” companies.

What are the next steps?

All investors, particularly joint-venture and collective investment vehicles, will need to consider the impact of the proposed changes on their investment structures, and the advantages and disadvantages of making the transparency and exemption elections.

If you have any questions about the proposed changes or you would like to discuss how these may impact your existing business, please get in touch.