For clients invested in these markets or thinking about being so you need to be aware of some fundamental tax changes which may impact these markets and most importantly will impact your after tax returns.

At the time of this alert, the United States GOP tax bill has been approved by both the United States Congress and Senate and was signed by President Trump on 22nd December. The UK government announced in its budget in November 17, significant future changes to the taxation of commercial real estate owned by non UK resident persons.

The US tax changes mean the US has chosen to put itself on more of a level playing field in relation to tax when compared with other sophisticated and liquid real estate markets. This comes about because of the reduction in the federal tax rates applicable to corporations and pass-through entities. The US federal corporate income tax rate has been reduced to a flat 21% from rates graduated to 35%. The US federal income tax rate on income earned through pass-through entities now benefits from a 20% deduction, There are of course other changes relating to the deductibility of expenses which will affect the way property investments will be made and affect residential and real estate differently. There will still be exposure to estate tax to US real estate investments made by individuals but for non US individuals it will be possible to put in place structures to mitigate or eliminate that exposure.

The UK is choosing a different path but one which aligns its tax rules relating to the ownership of UK commercial real estate to those of other major economies. The legislation, which has been outlined in a consultative document issued by the UK government after the UK budget in 2017, and which contemplates the legislation being affective in April 2019 would subject investment gains on commercial real estate owned by non UK residents to tax rates of 28% for individuals and 19% for companies and widely held funds. The rules will also apply to interests in entities which are "property rich". This marks a fundamental shift where investment gains on UK commercial property realised by non UK residents are currently not subject to UK tax at all. The UK government has decided go down a similar path to that which it has done in respect of gains on residential property owned by non UK residents which are now fully taxable as from April 2015. In addition residential property is subject to UK inheritance tax whether owned in a structure or not. The consultative document which has been issued makes no mention of extending UK inheritance tax to commercial real estate owned by non UK residents through structures but the risk of that happening cannot be ruled out. It should be stressed that the issuing of a consultative document does not mean the suggested changes will necessarily become law and of course there could be a change of government in the UK. Nonetheless based upon past consultation processes in the UK such as on the taxation of residential real estate there is a strong possibility that these suggested changes will be enacted.

It may be too early to gauge the impact of these tax changes to the behaviour of international investors and in particular those from low tax jurisdictions. However these investors need to be aware of the changes and how they might impact their global commercial real estate investment strategy. Investors will also need to consider how the structures on existing investments in these jurisdictions might need to be changed and what strategies should be adopted albeit the UK changes are only in the process of consultation.

Withers are monitoring these changes in both the US and the UK and are publishing detailed notes on the tax changes. The combination of our real estate and tax teams means that we are well placed to advice on the practical steps to take now and as they come in to play.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.