In November 2017, the UK Government's Autumn Budget announced significant proposals relating to the taxation of gains made by non-UK residents on disposals of UK property.  Amongst other provisions, it was proposed that, for the first time, capital gains tax (CGT) would be applied to non-residents' gains in respect of UK commercial property.  CGT would be applied in respect of not only direct disposals but also, where a holding vehicle was "property rich", an indirect disposal of an interest in such holding vehicle.

During the following consultation period, HM Revenue & Customs (HMRC) and HM Treasury (HMT) received over 120 responses from advisors, representative bodies and businesses (including the Jersey Funds Association and Jersey Finance).  In response, HMRC and HMT have met extensively with the property industry to understand the impact of the proposals.

Government Response

On 6 July 2018, the UK Government published its response to the consultation (the Response), together with draft legislation covering certain aspects of the proposed changes.  The Response notes that, in respect of certain areas and especially in relation to overseas funds and tax exempt investors, there will be a need for further technical consultation to navigate the complexities that have been highlighted by industry bodies during the consultation period.  However, it is positive to see that HMRC and HMT have at this stage put forward several proposals to address key concerns.

Indirect Disposals – Overseas Funds and Tax Exempt Investors

One of the key points raised in the consultation was that the additional costs and complexities for UK and overseas investors as a result of the implementation of the new CGT regime could result in UK real estate becoming a less desirable asset for direct investment.  This was exacerbated by two further issues if the proposals were implemented:

  • Investors who would be tax exempt if they had invested into UK commercial property directly (for example, UK pension funds) could be left exposed to tax on entities further down their investment structure
  • Investors in collective investment vehicles would be likely to suffer multiple tax charges on the same disposal, due to the structures used and commercial practice in this area

As tax exempt UK investors make significant investments in the UK real estate market through offshore funds, they would potentially be impacted by both of the above issues.

Accordingly, HMRC have put forward the following proposals, albeit subject to further consultation:

Transparency election

Entities qualifying as "transparent offshore funds", which would include Jersey property unit trusts, would be able to elect to be treated as transparent from the perspective of non-UK resident investors (the default position being that they would be opaque).  Interestingly, the Response notes that UK resident investors will retain their current treatment (e.g. that the entity would be treated as opaque), although it is queried whether the transparency will be expanded to cover UK resident but tax exempt investors (e.g. UK resident pension funds).

Whilst this proposal may not work for all structures where tax exempt investors co-invest alongside those subject to tax (please see below), it will, where applicable, protect tax exempt investors from CGT charges further down their investment structuring.

Offshore funds

Entities qualifying as "offshore funds" (whether transparent or opaque) that are not closely held would be eligible to elect for a special tax treatment under the new CGT regime.  Under such treatment, the fund itself would be exempt from gains from direct and indirect disposals of UK property, as would any non-resident entities within its structure.  However, investors in the fund will then be charged to CGT on the gain on their interests in the fund itself (based on the value of those interests).

It is proposed that "closeness" for an offshore fund would be defined using a similar requirements as for UK REITs.

Whilst there would be a reporting requirement to be able to elect for this treatment (the fund must agree to report details of their investors, disposals of interests by the investors and the value of those interests), this proposal would address the issues of multiple tax charges occurring on the same disposal throughout a structure.

Structures not qualifying as "offshore funds"

The Response acknowledges that there are often situations where exempt investors hold UK land through non-UK resident taxable entities, but such entities do not fall within the definition of an "offshore fund".  It was noted in the Response that this structuring practice was quite common to preserve an exempt investor's non-taxable status when investing jointly with investors subject to tax.

The introduction of the Government's broad CGT taxation proposals, combined with the concern that the above solutions do not cover such investment scenarios, could lead to exempt investors losing their non-taxable status when investing through such structures.

Whilst the Government does not intend to extend the exemptions noted above to all entities held by an exempt investor, it has committed to ongoing consultation with industry to consider the wider space of joint investment and impact on exempt investors.

Other aspects of the Response

Whilst this briefing has sought to focus on the impact of the Government's proposals on overseas funds and tax exempt investors, the Response from the Government covers a wide range of other issues raised, including:

  • "Property rich test" – there are to be two exemptions from this for trading assets and linked disposals
  • 25% investment requirement – the look-back period has been reduced to 2 years (down from 5 years) and a mechanic has been included to ignore short terms breaches of the threshold
  • As the intention of the proposals was to create a level playing field, rather than promote "on-shoring", there will be no new SDLT seeding or other reliefs introduced to allow taxpayers to move property from offshore to onshore structure
  • Existing CGT exemptions will continue to apply to UK REITs and PAIFs, but no new lightly regulated tax transparent UK fund vehicle will be introduced as part of the proposals
  • Use of Luxembourg double tax treaty – it had been previously considered that the existing DTA between the UK and Luxembourg did not allocate taxing rights over UK property-rich entities to the UK.  However, the Government has confirmed it is in discussion with Luxembourg and once again highlighted the targeted anti-avoidance rule and an anti-forestalling / anti-treaty shopping rule to address this concern
  • The commencement date is not going to be moved and is confirmed as 6 April 2019


The Response from HMRC and HMT is welcome news for offshore vehicles, which play a vital role in real estate investment structuring, especially for overseas and tax exempt investors.  The solutions put forward address many of the concerns raised during the consultation and the proposed continued dialogue with industry on the treatment of offshore funds is also promising.

Until the policy is finalised in the Finance Bill 2018-19, the Response remains only an indication of the Government's final position on the new CGT regime and it will only be once such regime is tested in real life structures that a clear picture of its impact will emerge, but, at this stage, the Response seems to be a step in a positive direction.

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