The draft legislation for the proposals to tax gains made by non-UK residents holding UK real estate was published as part of the Finance Bill 2018-19 on 6 July 2018.

The UK government announced on 22 November 2017 that it was seeking to introduce significant changes to the taxation of UK real estate held by non-UK resident investors. After a period of consultation, which closed on 16 February 2018, further details of how the proposals will work are provided in the draft legislation. The draft legislation itself is subject to technical consultation which closes on 31 August 2018. The legislation will take effect from 6 April 2019.

There has been much concern from the real estate funds sector about the application of these rules and how funds, investment and exempt investors will be affected. The rules that will apply to real estate funds are still being considered but the government has stated that it does not propose to delay the implementation date for collective investment schemes.

The core features

  • The government's main aim is to ensure that capital gains realised by non-UK resident investors on disposals of UK real estate are caught within the UK tax net, thereby aligning the UK tax position of UK residents and non-UK residents so that non-UK residents are not put in a more advantageous position when compared to UK residents.
  • Non-UK resident investors will be subject to a capital gains charge on the disposal of UK commercial property. Currently, any gains arising on such a disposal by a non-UK resident investor are not subject to UK tax.
  • More controversially, any gains arising on "indirect disposals" will also be subject to UK tax. Indirect disposals include, for example, disposals of shares in a property-rich company – see below.
  • It is important to note that for commercial real estate, historic gains will not be subject to UK tax. Only increases in value arising from 6 April 2019 will be caught by the new rules.
  • Non-UK resident companies will be liable to UK corporation tax on gains made on the disposal of commercial real estate from 6 April 2019. The current rate of corporation tax is 19% and is expected to reduce to 17% in April 2020. Commercial real estate held by non-UK residents will need to be revalued as at 5 April 2019 (although an election can be made to use original cost).
  • Non-UK resident individuals, trusts and certain others will be subject to capital gains tax on disposals of commercial real estate at a likely rate of 28%. Such persons are already within the charge to non-resident capital gains tax (NRCGT) on disposals of residential real estate, with any gain arising from 6 April 2015 being within the charge.
  • Non-UK resident closely held companies which are currently within the scope of NRCGT in respect of residential properties will become subject to corporation tax (although as under NRCGT, the gain arising from 6 April 2015 will be within the charge).
  • ATED-related capital gains will be abolished.

Indirect disposals

  • One of the more controversial aspects to the proposed regime is that the tax charge will be extended to apply to disposals of interests that derive at least 75% of their value from UK real estate e.g. shares in a property holding company. The capital gain would be calculated by reference to the increase in value of the interest from 6 April 2019 to the date of disposal (although an election can be made to use original cost).
  • The new rules will apply to the disposal of assets (e.g. shares) where:
    • at least 75% of the total market value of the company's assets are derived from interests in UK land (other than specifically excluded assets such as land used for trading purposes, which will be useful for land-rich trading entities such as hotel operators) (the property-rich test). Market value can be traced up through any number of entities; and
    • the person making the disposal has held a 25% or more interest in the two years immediately prior to the disposal (other than where the holding of more than 25% was for an insignificant time, which should be helpful, although is quite vague as drafted, for seed investors). As expected, there are rules regarding connected persons where a person can be treated as holding interests which are held by connected persons.

Indirect disposals and double tax treaties

The jurisdiction in which a non-resident is actually resident is important and the terms of the relevant tax treaty (if there is one) between that jurisdiction and the UK will need to be considered. Most UK tax treaties include a provision in the relevant capital gains article which allocates taxing rights to the UK for gains which arise on disposals of shares in UK property-rich companies. However, some treaties currently do not have these provisions and so the other state may have taxing rights over the gain. We understand that the government is seeking to amend these treaties (for example, the Luxembourg/UK Double Taxation Convention).

Offshore collective investment vehicles

The proposals have caused much concern within the real estate funds sector and the government has confirmed that it will continue to consult with it. Industry bodies such as the Association of Real Estate Funds are co-ordinating responses to the consultation and are working with HMRC. Two areas of interest which are under discussion are:

  • Transparent offshore funds will be able to elect for transparency for capital gains purposes. For example, a Jersey Property Unit Trust (JPUT) which, broadly, is transparent for income purposes but opaque for capital gains purposes, could elect to be treated as transparent for capital gains purposes. The effect of such an election would prevent a tax charge arising at the JPUT level and enable a tax-exempt investor to continue to benefit from tax exemption.
  • Offshore funds which are not closely held and which agree to reporting requirements, such as details of investors, disposals and value of interest, will be able to elect for a special regime whereby gains of the fund will not be taxable but the investor will be taxed on disposals of their interests in the fund.

Also, there will be a mechanism to collect tax if the fund ceases to meet the conditions or it is no longer UK property rich.

Other real estate tax changes included within the Finance Bill

The Finance Bill included a number of other real estate tax proposals, including:

  • For non-resident landlord companies, the move from income tax to corporation tax (taking effect from 6 April 2020).
  • SDLT compliance: The deadline for paying SDLT and filing SDLT returns will be reduced from 30 days to 14 days from 1 March 2019.
  • Capital gains tax payment window: on a disposal of UK residential property (which does not qualify for principal private residence relief) by UK residents or non-UK residents, a payment on account of the capital gains tax must be made and return submitted within 30 days from the disposal. This will take effect from 6 April 2020 (although some aspects will take effect from 6 April 2019).


The draft legislation is described as a work in progress and it is stated that the provisions published are the "core provisions". The technical consultation of the draft legislation runs until 31 August 2018 and further draft legislation will be published in the autumn.

Over the next few months, there is much to do in order to ensure that the new rules are effectively targeted and do not place unnecessary burdens on those affected, particularly for real estate funds (in terms of both the tax treatment and also on the administration side), bearing in mind the commencement date of 6 April 2019.

If you would like further information or would like to discuss this or any of the other proposed real estate tax changes in the Finance Bill, please do not hesitate to contact us.

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