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July 24, 2018


In a surprise announcement at the November 2017 Budget, the UK government announced its intention to tax gains arising on the disposal of commercial real estate from April 2019. Additionally, it was confirmed that following an earlier consultation, non-resident companies with UK property rental business would be subject to corporation tax (rather than income tax as is currently the case) from April 2020.

On 6 July 2018, the government published the draft provisions for inclusion in the Finance Bill 2018-2019 containing the detailed rules for both of these measures. They also provided their feedback in respect of the responses received from the real estate industry and advisory bodies to the consultation exercise that had taken place in respect of the taxation of gains.

In this edition of Tax Advisor Update, Jonathan Hornby reviews the proposals and provides a timely reminder of the sweeping changes set to hit non-resident investors over the next two years.

Capital gains on disposal

As anticipated the key principles are in line with those announced in November. To recap, these are as follows:

  • Disposals of either residential or commercial property taking place from April 2019 will be taxable largely on the same basis as residents are currently taxed;
  • The proposals extend to also apply to indirect disposals where property rich entities are disposed of (those which derive at least 75 percent of their value from UK real estate);
  • Optional rebasing to April 2019 market values for both direct and indirect disposals;
  • Companies will be subject to corporation tax on chargeable gains arising whereas other taxpayers will be within the scope of Capital Gains Tax.

Whilst within the space constraints of this article it is not possible to consider every minutiae of the rules there are a number of points of significance that are worth examining in further detail.

Exempt tax payers

Per the November consultation, the ambit of the measures is to capture taxpayers who previously were only exempt from tax as a result of being non-residents, rather than some other reason such as being a pension fund. The potential problem here is that the definition of “offshore pension scheme” in current UK tax law is fairly narrow and there is a concern that non-UK schemes may not qualify for exemption in every case. Of course, in the past this has always been a moot point – it didn’t really matter as even where a fund fell outside the definition they were not subject to UK tax in any case. HMRC is accepting detailed submissions as to where the current definition of offshore pension scheme is considered insufficient.

Existing reliefs

Existing reliefs and exemptions will apply to non-residents as they currently do for residents. These include the rules for no-gain/ no-loss treatment on intra-group transfers and the Substantial Shareholdings Exemption which exempts:

(a) gains made by companies on certain share disposals in trading companies; and,

 (b) disposals of shares in non-trading companies (including those carrying on real estate rental businesses) where the vendor company is owned by qualifying institutional investors.

There is also a specific new exemption for disposals by any taxpayer in land rich entities if the person making the disposal can reasonably conclude that the land has been used for the purposes of a trade for the preceding 12 months. This concession should allay some of the concerns put forward by the hotel and infrastructure industries during the consultation process.

Interaction with double taxation treaties

Whilst it has not previously been hugely relevant it should be noted that most of the double tax treaties concluded by the UK include securitised land provisions. Such clauses typically preserve taxing rights for the jurisdiction where the land is situated in cases where shares in land rich companies are disposed of and indeed the UK rules on indirect disposals have been crafted to mirror the typical treaty provisions.

One notable exception is the treaty with Luxembourg which currently contains no such provision meaning that any share disposal is dealt with under the basic capital gains rules which allocate taxing rights to the jurisdiction of which the vendor is a resident. In their recent publication, the government have reiterated that they are in discussions with Luxembourg to renegotiate the terms of the treaty. It is not clear how near to fruition such negotiations might be and it does not really seem in Luxembourg’s interest to cede taxing rights given the prevalence of Luxembourg resident vehicles in UK real estate ownership structures. There remains a concern that any changes to the treaty would not be grandfathered to pre-existing structures such that the opportunity to effect a non-taxable share disposal could be lost in the future.

It should be noted that the draft legislation includes measures that counteract any tax advantage derived from the application of a tax treaty where “the advantage is contrary to the object and purpose of the double taxation arrangements”. Additionally, there was an anti-forestalling rule introduced in November 2017 at the time of the original policy announcement to prevent taxpayers reorganising their structures into treaty protection ahead of enactment of the new law.

Collective Investment Vehicles

One of the areas that caused the most consternation at the time of the initial consultation was the treatment of Collective Investment Vehicles (CIVs) which are responsible for a significant proportion of the overall funding of the UK real estate sector. It is common for UK exempt investors such as pension funds to invest using offshore CIVs where they wish to invest collectively. This would not be to avoid tax but to retain their tax-free gains status when investing through subsidiary entities. Absent any specific rules to address the point, one of the key issues is that these structures would now potentially attract taxation on a disposal of property assets.

The draft legislation does not include any provisions addressing this, but rather it is an area where the government is continuing to engage with industry bodies. The direction of travel seems to be that there will be an elective regime whereby offshore funds would be able to opt for tax transparency such that taxation (or exemption) would take place at the investor level.

Transition to corporation tax

With effect from 6 April 2020, the territorial scope of corporation tax will be extended to include non-resident companies that are carrying on a property business in the UK. Periods of account that straddle that date will be split into two notional periods with the company being taxed in the earlier period as a non-resident landlord subject to income tax as is currently the case and the latter period’s profits subject to corporation tax.

At a first look, this may not seem too bad given that the ongoing reduction in the corporation tax rate will see tax levied at 17 percent (compared with the current 20 percent rate of income tax). However, as all of the regular corporation tax rules will apply there will be a broadening of the base. Notably, the corporate interest restriction rules and the hybrid mismatch rules are likely to result in higher effective tax rates for many commonly used fund structures. Taxpayers should be evaluating the impact on their existing structures to avoid unexpected surprises and to identify any inefficiency. Financial models for any new investment decisions should incorporate the restrictions.

There will also be significant changes to other computational rules. For example, non-resident landlords will now find themselves subject to the complexities of the loan relationship code and the disregard regulations that govern the taxation of fair market value movements in respect of hedging derivatives such as interest rate swaps. The correct application of such rules represents a compliance challenge in excess of that currently faced by the typical non-resident landlord.

There will be some grandfathering of any unutilised income tax losses which will be carried forward into the corporation tax regime. However, it should be noted that the new rules restricting the deduction of brought forward losses to 50 percent of a group’s profits in excess of £5m for any particular year will also apply.


One of the questions that many non-residents are currently evaluating is as to whether or not it is worth maintaining existing offshore structures. The answer to this question will be very dependent on the facts and circumstances.

For example, a fund that has its asset management activities in London, but which maintains a corporate structure in the Channel Islands for real estate ownership may consider that it is no longer worth the cost and effort of implementing the necessary governance arrangements to preserve non-residence status.

On the other hand, for a fund which has established a significant platform in Luxembourg there does not appear to be a significant downside in remaining there (and in fact, there may be an upside depending on the outcome of the treaty negotiations). It is worth noting here that the policy objective is not to encourage all of the non-resident owners of UK real estate to come onshore and the government reiterated this in the 6 July publication. Rather their objective is simply to put everyone on the same footing wherever they are established.

One of the barriers to onshoring will be potential stamp duty land tax costs (SDLT) costs. The government has rejected calls for SDLT seeding relief where investors transfer their assets from offshore vehicles to the UK. Whilst SDLT group relief will be available in some cases there will be plenty of other situations where the conditions for relief will not be met such that any restructuring to eliminate offshore vehicles that no longer provide any tax benefit will be hampered by a prohibitive transfer tax cost. An alternative to transferring assets for overseas companies is simply to relocate management and control to the UK.


Given that draft legislation is yet to be prepared addressing the most complex aspects of the non-resident capital gains charge (i.e., those concerning CIVs) it would perhaps have been a better idea to defer the introduction of the new rules until 2020. This would also have had the benefit of aligning their commencement with the changes to the taxation of income. We are potentially left with the anomalous situation in 2019 where a taxpayer that disposes of an asset needs to file a corporation tax return to report the gain on the disposal and an income tax return to report their income.

All of the technical rules set out in the draft Finance Bill are open for technical consultation until 31 August. The government seems committed to working closely with the relevant real estate industry bodies to achieve practical solutions to address the remaining unresolved issues and there remains every reason to be optimistic that a sensible outcome can be reached.

In the meantime, non-resident owners of UK real estate should be consulting with their advisers to understand the full impact of the changes on their business both in terms of current operations and future investment decisions.