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
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
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
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
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
What is the special
regime for collective
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.