UK tax changes impacting Real Estate

Simon Vardon

Simon Vardon, Director, Product Development – Real Estate

26 November 2018

UK tax changes impacting the Real Estate industry prepared by Simon Vardon and Chris Warnes

On Monday, 29 October 2018 the Chancellor of the Exchequer, Philip Hammond delivered his latest budget to Parliament. On Wednesday, 7 November 2018 this was followed by the publication of the 2018/19 Finance Bill which had been eagerly awaited by the real estate industry since it included the detailed draft legislation on the taxation of gains made by non-residents on UK immovable property. This briefing note focuses on the evolution of the Non-Resident Capital Gains Tax (NRCGT) proposals and the impact of this on the real estate industry now that the Finance Bill has provided more detail on the forthcoming legislation.

Background - NRCGT

In the October 2017 UK budget, one of the most significant changes to the taxation of UK real estate was announced.  The Chancellor proposed the introduction of Capital Gains Tax (CGT) for gains realised from direct and indirect disposals of UK commercial real estate made by non-residents of the UK. The new tax would take effect from April 2019. 

The key stated aim of the original proposal was to provide for parity in the taxation of gains arising from the disposal of UK commercial property between UK and non-resident investors.

What followed was a consultation which saw the draft proposals receive over 120 responses from industry bodies, investors and advisors.

The UK real estate industry has mobilised into action, because whilst the stated aims of the consultation launched by HMRC and HM Treasury were accepted, the initial proposals described within the consultation were a cause for much concern.

Two key concerns stood out:

  • The consultation proposed measures which at first, discriminate against overseas CIVs investing into UK commercial real estate; and
  • Exempt investors such as Pension Schemes and Sovereign Wealth Funds would only preserve their exempt status if investing directly into UK commercial real estate.

There was positive engagement with HMRC and HM Treasury during the consultation period and over the summer months.

Industry feedback has shaped the way in which the new NRCGT will be implemented.  In particular, industry feedback focused on the interaction of Government’s proposals with typical real estate investment vehicles and exempt investors.

Draft legislation published

The Finance Bill published on Wednesday, 7 November 2018 introduced two new regimes:

  • Transparency Regime: This is available to overseas CIVs, which are income tax transparent and UK property rich. Jersey Property Unit Trusts (JPUTs) which are UK property rich will meet this definition. With the consent of all investors (all unit holders for the JPUT), an election for transparency can be made in relation to NRCGT. NRCGT will consequently only be applied at the level of the investor. This election is irrevocable, even with a change in ownership of the CIV.
  • Exemption Regime: This is available to overseas CIVs, which are UK property rich and widely held. The election is made by the Fund Manager and the consequence of this is that the CIV and all subsidiaries will be exempt from NRCGT on direct and indirect disposals. NRCGT will be applied at the investor level. Various reporting obligations come with this election.

In practice we expect that the Transparency Regime will be most relevant to joint venture-type JPUTs where exempt investors are present. The election into the Transparency Regime will allow the exempt investors to preserve their tax status should a divestment of the units in the JPUT be made. With the election made, the unit trust will be transparent for both income and capital gains taxation purposes.

The Exemption Regime offers overseas CIVs a comparable status to the UK REIT regime with regards to the taxation of gains. The most attractive aspect of this regime is that it applies to all underlying subsidiaries as well as the CIV itself.  Whilst this election can be revoked, it is unlikely to be in practice.  Expectations are that overseas CIVs which are eligible will make the election into the Exemption Regime.  Fund Managers will need to understand the new reporting obligations which arise with the Exemption regime election.  For CIVs established prior to 1 June 2019, there are some allowances if legal arrangements prohibit completion of some of the reporting requirements. 

Also worth noting; CIVs established after 1 June 2019 these allowances do not exist and so fund managers will need to ensure that fund documentation with investors enables them to meet their new reporting obligations.

Regime election considerations

Whilst there is a general expectation that entities which can elect into the new regimes will do so, some careful analysis is highly recommended. The impact of an election needs to be considered for the structure itself, the investors and with a view on exit strategy.  One important factor to also consider is that from April 2020 non-resident landlords will become taxable under UK Corporation tax, and it is recommended that this dynamic is part of the regime selection thought-process.

For existing CIVs elections can be made retrospectively up to 5 April 2020 (to be effective from 6 April 2019), it is advised that analysis and conclusions are completed ahead of April 2019, so that certainty can be provided to investors and where relevant, tracking of reporting requirements established.


The UK Government has announced an update to the UK REIT regime as a consequence of the finalisation of the Exemption Regime. That update extends the exemption of UK tax for indirect gains arising from the sale of property rich subsidiaries, to the existing exemption for gains arising from direct asset disposals. This change delivers equivalence in the treatment of gains between the two regimes.

Our view

We expect that the Transparency Regime will prove to be popular for simple asset owing structures.  Indeed, we may see an increase in the use of JPUTs as PropCo’s (as opposed to the use of corporate entities), given the ability afforded by the Transparency Regime to deliver a simple vehicle which is transparent for both income and gains.

For some investors REITs may become the most attractive vehicle, however, where the REIT rules are deemed too restrictive for some fund managers, then the Exempt Regime may provide the desired structuring solution.

New October 2018 budget announcements relevant to real estate:

The budget did not include any changes in the magnitude of the NRCGT proposals, however, there were a couple of more minor noteworthy updates:

  • A new capital allowance termed the structures and buildings allowance at a flat rate of 2% relating to the construction of commercial property; and
  • A consultation has been launched into proposals to introduce stamp duty land tax at a rate of 1% in relation to the acquisition of residential property in England and Wales by non-residents.

April 2020 a significant date for Non-Resident Landlords:

From April 2020, non-resident landlords currently subject to UK income tax on net rental income will transition into the scope of UK corporation tax. The UK corporation tax regime has enacted a number of anti-BEPS measures, including new interest deductibility rules. In general, UK corporation tax can be considered more complex and therefore non-resident landlords would do well to consult with their advisors about the changes and impact.

Concluding thoughts:

There is no shortage of significant tax considerations and new rules to grapple with, for both investors and managers of existing structures.  It will be important for analysis to take place in the coming months, with the draft legislation now published, to ensure that the right decisions are made with respect to new regimes and future structuring plans.

As always, the real estate team at SANNE will be monitoring developments closely and supporting our clients to navigate through the changing landscape. To read the full Technical Note, click here.

Should you have any further questions please feel free to contact Simon Vardon Director, Real Estate and Chris Warnes,  Director, Real Estate. 

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