UK Tax Changes Impacting Real Estate 13 July 2018

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Simon Vardon

Director, Product Development – Real Estate

Taxing gains made by non-residents on UK immovable property

On 6 July 2018, HMRC and HM Treasury issued a Summary of Responses to their consultation and an updated Policy paper. HMRC and HM Treasury launched their consultation document “Taxing gains made by non-residents on UK immovable property” on 22 November 2017 requesting responses by 16 February 2018. 120 responses had been received, primarily from the advisory profession and industry bodies. SANNE also responded to the consultation and we have been closely monitoring developments.


Chancellor Philip Hammond first announced the change within his Autumn budget.  The key proposal was that from April 2019 gains realised from the disposal of UK commercial property by non-residents will be taxed, marking a change in policy which has stood for over 50 years.

The proposed rules would apply to both:

  • Direct asset disposals.
  • Indirect disposal gains of “property rich” entities.

HMRC and HM Treasury subsequently issued a consultation on the subject, which outlined how the tax and calculations would work. Their consultation noted that the core features were fixed.

HMRC and HM Treasury have now issued their responses to the consultation submissions. It is important to note at this stage that some areas remain subject to further consultation and finalisation, but it is most welcome to note that “Officials from HMRC and HM Treasury met extensively with the industry to establish the impact of the policy and test the rules proposed in the consultation document,” and that the Government has welcomed the constructive input from the industry.

Concerns voiced within the consultation feedback

Having digested the proposals and the detail in the consultation paper, there were a number of key items which have been focused upon within the Real Estate industry, by advisors, investors and service providers. Below we discuss the key concerns and the outcomes at this time.

Exempt Investors & Collective Investment Vehicles | Exempt Investors - background:

Concerns were raised that the initial proposals would only see Exempt Investors, such as Pension Funds and Sovereign Wealth Funds, preserve their status through direct investment into the property.  As previously drafted, indirect investment, including via collective 

investment vehicles (“CIVs”), would result in these exempt investors indirectly suffering the tax.

CIVs– background:

Concerns had been raised by respondents that, as drafted, the proposals did not provide a parity of treatment between UK and Overseas CIVs, which would befit the policy objective. One recurring example provided, was that the initial proposals could result in the same gain being taxed multiple times within an overseas CIV (e.g. directly at a PropCo level and then indirectly when an investor disposes of their interest in the CIV).  Respondents had also noted that it was not apparent how the Statutory Instrument (SI 2017/1204) which impacted Offshore Funds, reconciled with the proposals.

Exempt Investors & CIVs – current status:

The Government has noted that these were the two major areas of focus by respondents.  The language in the Summary of Responses is encouraging.  The Government have stated that they will continue to engage closely with the industry to produce rules that address these two issues.  The Government has acknowledged the submissions that “it was normal for UK exempt investors, such as UK pension funds, to invest using offshore CIVs; not as a means of avoiding tax, but to retain their tax-free gains status when investing through subsidiary entities”. The proposals are thus noted to be relevant to both UK and Non-UK Exempt Investors.

The Government response notes two core proposals, which it believes will go most of the way to addressing the issues:

  • Transparent offshore funds will be able to elect for transparency for the purpose of capital gains from the position of a non-UK resident investor (UK investors will retain their current treatment); and
  • Offshore funds that are not closely held, and which agree to reporting requirements, will be able to elect for a special tax treatment whereby gains by the fund or within its structure will not be taxable, but the investor will be taxed on disposals of their interest in the fund.  This treatment would apply whether the fund was transparent or opaque.

The Government has further recognised that Exempt Investors will be involved in structures which do not fit the definitions described above and has recognised that other solutions will need to be considered in these situations.


Although subject to finalisation, the updates from the Government are very welcome on these two very key areas. The Government should not have to compromise on its policy aims, but there is a clear desire to address the concerns raised by the industry. They have stated that they will continue to engage closely with the industry as legislation is finalised.

Indirect investment tests (Property rich and 25% ownership test) | Indirect investment tests - background:

To implement the tax for indirect disposals, the consultation introduced two new tests. The property rich test described how the tax would apply to a disposal of an interest in a structure which was property rich (75% or more of the underlying value derived from UK real estate). The 25% ownership test scoped out investors holding less than a 25% ownership in a structure, but included both a five year look-back and consideration of connected parties/acting together.

Respondents noted that whilst the property rich test would determine when to calculate the tax, the calculation itself would tax the gain on disposal in full (up to 25% of which might not derive from UK property). It was further highlighted that if the 25% ownership test was to apply to Funds, seed investors would potentially be caught and clarity was sought as to whether ‘acting together’ could unintentionally catch all investors in a Fund.

Indirect investment tests – the current status:

HMRC and HM Treasury have acknowledged that the property rich test will potentially tax non-UK property related gains, but have confirmed that the legislation will remain as drafted in this area, citing that alternative options would be more problematic. On the subject of the 25% interest test, updates have been announced: 

  • The look-back will be two years instead of five years.
  • The ‘acting together’ scope has been narrowed and clarified.
  • The scope-out of minority investors (<25%) will not be available to CIVs.

Contrary to the initial proposals the option to use original cost rather than the April 2019 value will be available for indirect disposals.


Clarity has been provided by HMRC and HM Treasury and the updates are broadly welcome.  The scope-out of the minority investor exemption from CIVs has been concluded upon owing to the potential to spark conflicting demands from investors in a CIV, now that the Government has provided the option to elect for transparency.

Other noteworthy updates:

  • The Government have resisted the many calls to delay the implementation to April 2020 (the date from which the non-resident landlord scheme will tip into Corporation Tax).  Although many details remain subject to finalisation the tax remains set to come into force from April 2019.
  • A trading exemption has been confirmed for disposals of property rich entities which were trading before and after the disposal.
  • The Summary of Responses included a number of consistent submissions in relation to Luxembourg (where concerns were raised that the use of Luxembourg offered a means to structure around the tax). The Government has responded that it is in discussion with Luxembourg and that it is the UK policy to pursue the securitised land provision, which allows taxation of indirect disposals of UK land. In the interim they believe that the anti-forestalling rule will tackle any treaty abuse in this area. 

Contact us for further information

Should you have any addition information, please contact Jason Bingham, Head of Real Estate and Simon Vardon, Director, Real Estate.