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Autumn Budget 2017: Dramatic changes to the taxation of non-resident investors in UK real estate

Autumn Budget 2017: Dramatic changes to the taxation of non-resident investors in UK real estate

  • United Kingdom
  • Real estate
  • Tax planning and consultancy - Budget


As a major change to the status quo for the taxation of non-UK investors in UK real estate, the Chancellor’s Autumn Budget statement announced:

  • the extension of UK taxation of capital gains from April 2019 to all types of UK immovable property, which in particular encompasses UK real estate – both commercial as well as residential;
  • the extension of CGT/corporation tax to indirect disposals of interests in “property-rich” vehicles by non-residents; and
  • as expected, the extension of corporation tax to income (and now gains also – see above) receivable by non-resident corporate landlords from April 2020 (see separate article).

These proposals represent a complete change to the long standing status quo on the taxation of UK real estate for non-UK investors and will have a major impact for many business models, including on anticipated returns.


The government’s aim in the CGT proposals is to align the UK with other countries (most of which already have taxing rights over capital gains on local property), to remove a tax advantage which non-residents have over UK residents, to tax the profit at its source, and, especially in light of the Paradise Papers, to prevent the facilitation of tax avoidance through the use of offshore structures. It is not yet clear if the wider impact on the economy and ancillary effects have been fully considered.

The changes will be bad news for some, but may provide a welcome opportunity for others, if HM Treasury succeeds in its aim of levelling the playing field between onshore and offshore investors, with a resultant impact on pricing.

Changes in respect of gains on residential property held by non-residents had been mooted in the course of the recent consultation on the taxation of non-resident corporate landlords, but not expressly in relation to commercial property, so the extent of the announcement had not been generally expected – at least not this soon.

Investors will need to consider their structures and funding positions (see below). Notably, anti-forestalling rules, which will impact on what can be done to avoid the impact of the changes, have been introduced with immediate effect.

What is proposed?

Four main things:

  • Capital gains made by non-residents on disposals of UK real estate accrued on or after April 2019 will be brought within UK tax. The proposal is actually worded as applying to “immovable” property generally (following its double tax treaty meaning) so is likely to extend beyond pure real estate to certain infrastructure transactions. At the moment, gains on disposals of UK commercial property by non-residents are generally outside the scope of UK tax altogether, so this is a radical change. The new charge is subject to targeted exemptions for certain institutional investors, which are not otherwise subject to UK tax on gains other than by residence, such as sovereign wealth funds. However, the proposed changes will catch non-UK funds holding UK real estate and the existing “widely-held” exemption from NRCGT is to be abolished for those holding residential property. For commercial property, gains will be rebased to 1 or 6 April 2019 (depending on whether they are subject to capital gains tax or corporation tax), such that only gains after that date should be caught (with an option to use original base cost if this would give a better result for the tax payer).
  • Tax on indirect disposals of interests by non-UK investors in property-rich entities will also be introduced, also from April 2019. Property-rich entities will be those deriving 75% or more of the gross value of their assets from UK real estate (whether commercial or residential) at the time of disposal. Where the interest is held by a group of companies or trusts, it will be the group structure as a whole that will be considered to see if the 75% test is met. Gains that will be caught will be those where the investor and related persons (and those with whom they are “acting together”) have held an interest of 25% or more in the last 5 years (including in years preceding 2019). The gain will be based on the interest disposed of (not the underlying real estate). This could potentially also include disposals by non-residents of interests in UK funds and REITs, which would not currently be taxable. In addition, it will catch disposals of interests in partnerships and trusts. Again, there will be rebasing to April 2019. The consultation recognises, however, that while most treaties give taxing rights to immovable property to the state where the property is situated, they do not all allocate taxing rights to indirectly held immovable assets or to assets held through a series of entities. It is recognised that some of these holdings would, therefore, be treaty-protected from the new charge. Accordingly, anti-avoidance measures are being introduced with effect from Budget Day (i.e. they are already in force) to prevent treaty shopping, namely the structuring of assets to take advantage of these treaties, pending such treaties being changed (which could take some time). Meanwhile, it would appear that the indirect holding of such indirect entities should not come within the new charge.
  • The new CGT charge will also be extended to certain widely-held companies, which hold residential property, but which may be currently exempt from non-resident CGT (NRCGT). In particular, the current NRCGT exemptions are to be replaced with a more targeted relief only for investors who are generally exempt from UK tax on capital gains (other than by being non-resident) such as UK pension funds and, we would anticipate, sovereign wealth funds. Some investors may, accordingly, lose some of the benefits they enjoy at present, but hopefully not all. Rebasing will apply, for those entities which are treated as widely-held for the purposes of NRCGT, from April 2019. Otherwise, the usual 1 April 2015 rebasing date will be used for those in the NRCGT regime.
  • Gains must be reported within 30 days of the disposal. Reporting obligations will be introduced for certain third party advisers, in particular where they are not satisfied that the disposer has reported the disposal. The reporting deadline for third party advisors is proposed to be within 60 days of the disposal.

Importantly these changes will cover all types of real estate – commercial, offices, hotels, leisure, agricultural land and forestry, as well as residential land. The charge will be to corporation tax for companies and otherwise to CGT. There will be the usual secondary liabilities provisions allowing recovery of tax from UK representatives or from related companies.

HMRC are using the proposals to streamline the various different CGT-related provisions including those related to ATED gains.

On a more positive note, the position should not disturb the new substantial shareholder exemption introduced on 16 November 2017 for disposals of certain substantial interests where the investment exceeds £20 million (for more on which see below) and where the other conditions are met.

What else is mooted?

To protect and support the measures:

  • targeted anti-avoidance measures are to be introduced with effect from 22 November 2017 to prevent abuse. These are, in particular, aimed at avoiding treaty shopping to avoid the indirect charge;
  • a more general targeted anti-avoidance rule will also be introduced from April 2019; and
  • indexation allowance for corporation tax on chargeable gains will be frozen from 1 January 2018.

For fairness, it will be possible to offset losses arising against gains in the company or group (whether residential or commercial) and personal allowances will be available.

While the key provisions are established, a consultation has been published which will consider some of the finer detail. It is expected that draft legislation will follow the outcome of the consultation next summer. 

What next?

The consultation document published on 22 November 2017 raises various questions for consideration, so the position is not yet carved in stone. The consultation will close on 16 February 2018. A key area here will be the extent of the various exemptions from the new CGT charge. It is suggested that representations should be made by affected persons directly or, alternatively, fed into the consultation responses of various representative bodies, such as the British Property Federation (BPF), the Association of Real Estate Funds (AREF), and the Association of British Insurers (ABI), amongst others.

Helpfully, the government has said that while some of the measures are fixed, they will be keen to consult to ensure that the legislation is effectively targeted and does not place unnecessary burdens on affected taxpayers. So, the government is still in listening mode. The industry should make the most of this.

The government will publish its draft response to the consultation in late summer 2017 together with draft legislation. There is, therefore, potentially a nine month wait before any real clarity emerges on the final detail.

Who will be affected?

While the devil will be in the detail, which will not become clearer until the summer, some early observations are set out below.

Offshore Investors

This group will be most obviously impacted by the changes. We expect some strong lobbying here, given the extent of current offshore investment in the UK. This could be investor based (i.e. type of investor – this is the part that HMRC is concerned at the moment to ensure is not too broad) or product based (i.e. using tax as a tool to incentivise the investment sought).

Sovereign Wealth Funds (“SWFs”)

Non-resident companies and others holding UK real estate and immovable property directly or indirectly will be affected, unless they clearly qualify for an exemption. SWFs, at least, should continue to enjoy an exemption on direct holdings.

Those subject to NRCGT or ATED CGT

In the residential arena, those already in the NRCGT or ATED CGT regimes will be brought within the new CGT provisions. Those relying on the current “widely-held” NRCGT exemption will be very carefully looking at the proposals for the exemptions that will replace this.


Both commercial and residential real estate funds will potentially come within the charge to tax on capital gains on UK real estate. A focus here will be on what exemptions will be allowed, not just for the investors themselves, but also in calculating the impact on the vehicle itself, particularly if it has what would otherwise be tax exempt investors. Will there, for example, be any sort of look-through to the ultimate investors in determining the tax payable by the vehicle, if there is a direct sale of the underlying property, similar to the substantial shareholder exemption mentioned below?

On the residential side, a major change will be the abolition of the “widely-held” rule, which currently exempts many offshore funds and companies from NRCGT. It is clear that the government intends that the new exemption will be narrower in scope. Potentially, therefore, some funds may not continue to qualify or not to the same extent. A focus for lobbying here, therefore, could be for an exemption for certain types of assets e.g. those that the government wishes to encourage, such as build to rent and the provision of many more new, good quality homes.

It is not clear how the new proposals will interact with the previously published draft regulations on changes to the CGT treatment of certain “offshore funds” (such as some JPUTs and contractual funds) which were circulated in March. These, effectively, as currently drafted, would mean that, where applicable, the relevant vehicle would no longer be treated as a company for CGT. Again, if implemented in its current form, this would be another unexpected key change of law. Clarification about precisely how this is intended to operate in tax terms and how it would interact with the latest proposals is needed as soon as possible in order to focus the precise lobbying.

As for other corporate landlords, for those funds which are corporate in form (or which are transparent for income with corporate non-resident investors), the potential CGT charge will be in addition to the extension of corporation tax to non-resident corporate landlords. The latter, for those with internal gearing, could have a more immediate impact on yield.

Pension funds

Pension funds which would be tax exempt if they held assets directly, will be concerned to ensure that they are not now indirectly penalised by holding assets through historically popular offshore structures such as JPUTs. They will also be looking to see what exemptions/look-throughs might be provided.

Real Estate Investment Trusts (“REITs”)

REITs holding UK property through offshore companies will currently bring their property income into the charge to CGT, but such income should be exempt income and so treated within the REIT in the usual way.

REITs holding property indirectly through tiers of offshore companies will potentially be brought into the charge to CGT on disposals of shares which may not, at present, be taxable if the shares themselves are held offshore. These would not get the same tax benefit as direct holdings above.

While, at present, non-UK companies can invest in REITs and be outside the scope of UK CGT, those groups holding an aggregate of 25% or more could come within the charge – even where one particular company does not have a 10% interest, by reason of the aggregation rules. It is not stated, or indeed implied, that this approach (i.e. the ability to disaggregate holdings) would extend to the interpretation of the dividend rules which could cause the REIT to suffer a tax charge on a dividend being paid. We suspect that this would not be the case, provided that there is correspondingly no treaty benefit obtained (which is the point these rules were originally introduced to address). The concern regarding the “acting together” test raised by funds more generally may also be of concern to some investors here.

Life companies exempt from NRCGT

One particular exemption from NRCGT that the consultation paper says will be disapplied is the exemption for life companies holding interests for the purposes of long term insurance business.

Private Equity Real Estate Funds (“PERE”)

Private equity structures which may hold property through offshore structures will be concerned about the tax collection mechanism.


In terms of the indirect charge, investors will have to carefully consider their position, which may depend on the relevant double tax treaty, or whether there is one. The question as to whether the UK would have taxing rights or whether the relevant interest would be considered "property- rich" may vary from direct disposals to disposals of shares in the propco to disposals of interests further up the chain. This, along with the interaction with the general corporation tax provisions and grouping rules will be relevant. Currently, certain investors would expect to be outside the charge to tax under the provisions of an appropriate double tax treaty, where treaty rights are given to the place of the disposer's residence, not where the real estate is situated. The UK-Luxembourg treaty is one such treaty. The anti-forestalling rules are planned to stop structures being established there (and in other jurisdictions with similar treaty provisions) from 22 November 2017, where the arrangements are designed to achieve a tax advantage.

Substantial Shareholding Exemption (“SSE”)

Historically, SSE applied only to trading companies or groups holding a 10% or more interest in ordinary shares in certain trading companies where the shares had been held for a period of at least 12 months in the last 2 years.

In Finance (No.2) Act 2017 (enacted on 16 November 2017), SSE was extended (amongst other things) potentially to disposals by a qualifying investing company which has (1) invested £20m or more in the ordinary share capital of another company and (2) held it for at least 12 months continuously in the last 6 years.

The relief operates by effectively operating a look-through to the existing investors. Where, immediately before the disposal, 80% of the “ordinary share capital” of the investing company is held by “qualifying institutional investors”, the gain in the investing company is exempt from tax in full. Where at least 25% but less than 80% of the ordinary share capital is held by qualifying institutional investors, then the amount of the qualifying gain (or loss) is proportionately reduced. The optimal position is, therefore, to have 80% held by qualifying institutional investors. How the taxable portion of the gain is dealt with otherwise is likely to be dealt with by agreement, otherwise it would fall to be shared between them pro-rata in the usual way.

The relief is not available to all: a qualifying investing company must not be a company whose shares are listed on a recognised stock exchange (unless it is a UK REIT which is only not “close” by reason of having institutional investors – this will not include all REITs) or itself is a qualifying institutional investor.

“Qualifying institutional investors” are, broadly, registered pension schemes, certain life assurance businesses, sovereign wealth funds, charities, authorised investment funds and exempt unauthorised unit trusts which are diversely-owned.

This relief will apply regardless of whether the investee or investor company was trading or holding its assets as an investment.

At present it is understood that it is HMRC’s view that the relief will not apply to entities such as offshore property unit trusts and other contractual vehicles. These are not bodies corporate and, despite being deemed companies for CGT purposes, they do not have “ordinary share capital”. It should be clarified in the course of this consultation whether the position here is likely to change as part of the new proposals.


Some non-UK resident investors – particularly those investing via corporates – may be more impacted by the more general changes to the corporation tax treatment of non-resident corporate landlords from 1 April 2020 than the CGT changes, in particular, around the potential restrictions on the deduction of interest and the use of brought forward losses to shelter tax on income, as these restrictions could more quickly impact on yields once the new rules are in force.

Those investing for the very long-term, for reasons such as diversification and safe harbour for capital preservation of their assets, may not be unduly put off by the new rules, all other things being equal, and in particular, with current exchange rate benefits. Assuming that corporation tax rates fall to 17% by 2020, there may even be an upside for some (though, it is thought, few!).

Those seeking to exit an investment may, however, find that their target purchaser market changes and that the market slows down as investors get their heads around the potential impact of the changes e.g. is there now latent UK tax in the structure which could impact on pricing and attractiveness?

On the plus side, UK-based institutions holding property directly may find that the rules result in repricing, which may mean that their position in acquiring certain assets becomes more competitive and that assets can be acquired at a better price with an improved impact on yield.

Advisers, too, will be concerned to understand properly the position of their clients when they are selling property assets to check whether they also have a reporting requirement. Lawyers, in particular, are likely to be impacted by this.

There is no doubt that the proposals are, however, already causing a furore and that extensive lobbying is anticipated from certain sectors and overseas investors.

While understanding, on a basic level, where the government is coming from on these proposals, it should not be forgotten that a buoyant market, aided by important and substantial money from outside the UK into the whole real estate and immovable property sector, brings key revenue for HMRC from all the taxes paid by the various parties who participate in transactions across the sector, both at a direct “bricks and mortar” level and as part of sophisticated structures. These parties range from construction companies, estate agents, surveyors, specialist advisers, administrators and valuers to accountants and lawyers, not to mention all the secretaries and other key staff who support these roles, with consequential impacts on productivity and employment for all. There has already been much uncertainty with the Brexit vote, a snap general election and other political headwinds.

The final drafting of the legislation needs to be balanced between the above factors and political gains, as against simply estimated figures on directly-imposed increased tax takes.

What do we expect to see?

While some investors may just adapt to the change and take the tax hit, more likely, and following a movement that has already started, we expect to see increased interest in use of UK vehicles such as REITs, exempt unauthorised unit trusts, authorised contractual schemes (ACSs) and property authorised investment funds (PAIFs), which do not charge property gains to tax, provided certain conditions are met. This movement is going to be further stimulated by the extension of corporation tax generally to offshore investors, in particular due to the potential disallowance of some or all connected party interest and other costs. We are likely to see increased and renewed interest in the extension of UK vehicles so as to offer investors and managers the range of products and structures they need to continue to make UK investment attractive to the full range of investors as it has been to date. Work has already started on this.


Meanwhile, for those affected, the advice must be to participate actively in the consultation process, both directly and through relevant industry bodies.

Helpfully, we believe that the government is still in listening mode.

Please view our dedicated Autumn Budget 2017 hub here. It will give you access to our watch list, our contributors and relevant articles and tweets.

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