The introduction of Non-resident Capital Gains Tax (NRCGT) in April 2019 has significantly impacted non-UK resident investors who were historically exempt from tax on disposals of UK real estate. It is important that investors consider this carefully as part of their exit strategy, especially in light of recent changes to the UK/ Luxembourg tax treaty, which extends NRCGT to another large investor population.

NRCGT

Gains made by non-UK resident corporate investors on disposals of UK real estate, whether directly or indirectly through the disposal of UK property rich companies (broadly, where 75 per cent or more of the gross value of its assets derive from UK real estate), are subject to UK corporation tax (currently at 19 per cent).

Please note that that there are separate rules that have been in place for the disposal of residential properties since 6 April 2015, which are not covered in this article.

This article discusses the specific rules which apply to UK property-rich offshore Collective Investment Vehicles (CIVs) to limit the potential for multiple layers of UK taxation and other unintended consequences of the rules for certain tax-exempt investors in such CIVs.

What Is a CIV?

Broadly, a CIV for NRCGT purposes includes the following:

• A collective investment scheme, such as partnerships, property authorised investment funds (PAIF), authorised unit trusts (AUTs), Jersey property unit trust (JPUT) and other offshore unit trusts;
• An Alternative Investment Fund;
• A UK Real Estate Investment Trust; or
• A company that resides outside the UK and meets particular conditions, including the property income condition and non-close company condition.

What Tax Elections Are Available?

Effectively, the NRCGT rules for CIVs are intended to tax investors in a way that provides a similar outcome to direct investment in the underlying assets. Qualifying CIVs may make the following elections where certain conditions are met:

• Transparency Election – allowing certain ultimate investors with tax-exempt status (e.g., certain sovereign wealth funds and pension scheme) to preserve the tax-exempt treatment of capital gains.
• Exemption Election – allowing tax charge on the gains at the level of the CIVs or its underlying companies to be deferred until the investors in the CIVs realise their investment or receive distributions out of gains from the CIVs; the crystallised gains may remain exempt for certain tax-exempt investors.

Different qualifying conditions and tax considerations, outlined below but not exhaustively, are associated with each election. These elections must be considered on a case-by-case basis according to the investor base.

Transparency Election

 Exemption Election

How A&M Can Help

As mentioned above, the rules regarding CIVs are complex. A&M’s trusted Global Real Estate Team work closely with clients to help navigate these rules and provide expert advice on how CIV elections may benefit certain investment structures and the tax efficiencies that may be achieved.

Contact our team today to discuss how we can help your business make the most of the opportunities available.