Leveling the Playing Field? Taxing Gains Made by Non-Residents on UK Real Estate

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Leveling the Playing Field? Taxing Gains Made by Non-Residents on UK Real Estate

By Ben Roberts*

On 22 November 2017, the Chancellor of the Exchequer announced[1] plans for a significant extension to the UK tax regime applicable to non-UK residents realising gains from UK real estate.

From April 2019, it is proposed that all gains from UK real estate realised by non-UK residents, whether of residential or non-residential (commercial) property and whether by way of direct or "indirect" disposal, will be subject to UK capital gains tax or corporation tax on chargeable gains[2]. This will be a fundamental change to the scope of the UK tax regime, which has historically been very favourable for non-UK investors investing in UK real estate.

Current UK tax rules

The UK tax rules applicable to UK real estate purchases, holdings, and sales have been the subject of considerable change over recent years. This has resulted in, arguably, a rather incoherent tax regime with different rules for (1) residents as opposed to non-residents, (2) residential property as opposed to commercial property, and (3) individuals as opposed to corporate and other "non-natural" entities.

The UK does not generally tax non-residents on disposals of UK commercial real estate. Under existing UK tax law, non-UK residents[3] are only subject to UK tax on investment gains realised from UK residential property. This specific "non-resident capital gains tax", or NRCGT, regime, in addition to relating only to residential property, only applies to non-resident individuals and "closely-held"[4] companies.

The current UK tax regime also only applies to gains realised on direct disposals of UK residential property by (certain) non-UK residents.

The current[5] UK tax regime, for disposals of UK real estate by non-residents, can be summarised as follows:

Disposal type

Gain subject to UK tax?


Direct disposal of UK residential property by non-UK individual, trust, personal representative or "closely-held" company




Direct disposal of UK residential property by non-UK "widely-held"[6] company




Direct disposal of UK commercial property by non-UK resident



Indirect disposal of UK property, of any type, by any non-UK resident



Disposals of UK property, of any type, by non-UK resident if dealing in or developing land with a view to sale



What is proposed?

The Consultation Document, published on the same day as the Autumn Budget 2017, makes clear the government's view that non-UK residents have an advantage over UK residents when it comes to the taxation of UK commercial real estate, due to the fact that "unlike most other major jurisdictions" the UK does not exercise its full taxing rights as afforded by international tax rules.

The Consultation Document also recognises that, under existing UK tax law, (1) gains realised by "widely-held" non-resident companies on sales of UK residential property, and (2) gains made by non-UK residents upon disposals of entities that derive their value predominantly from UK real estate are, in each case, not subject to UK tax.

In summary what is proposed is that, from April 2019[8], a single UK tax regime will apply for disposals of both residential and commercial UK real estate by non-residents, comprising:

1. a new UK tax charge for gains on UK commercial real estate;

2. an extension of the existing rules for taxing gains on UK residential real estate; and

3. in each case (ie for both commercial and residential UK property) an extension of the UK tax charge to gains made by non-residents on "indirect disposals" of UK "property rich" interests.

The applicable rate of UK tax will be 19%[9] for non-resident companies caught by the new rule and, it seems, 28% for non-resident individuals and others.

For in-scope disposals of (1) UK commercial property, (2) UK property by "widely-held" non-resident companies, and (3) "indirect disposals", the new tax charge will in each case only apply to gains arising since April 2019 (i.e property held at that date will be rebased to its current market value). There is an optional relaxation of this rebasing requirement for in-scope direct disposals only (see further below).

For UK real estate disposals already within the existing NRCGT regime, April 2015 will remain the point at which rebasing is required.

The Consultation has now closed. In any event, the Government has made clear that the "core features" of the proposed changes are fixed.

Direct disposals

All gains realised upon direct[10] disposals of UK real estate (both residential and commercial) will become chargeable to UK tax, regardless of the residence status of the person making the disposal. The applicable rate of tax will be that which would apply to an equivalent disposal by a UK resident, namely the UK corporation tax rate for corporate bodies and, for individuals, trusts and personal representatives, the appropriate capital gains tax (CGT) rate.

The exclusion that exists under the current NRCGT regime, for so-called "widely-held" non-resident companies, will be removed.

Broadly, it is proposed that capital losses and gains arising to non-UK residents within the scope of the new regime will be subject to the usual rules, so that:

1. a non-resident company within the scope of the new rules will, if realising a capital loss on disposal of UK real estate, be entitled to offset this against its chargeable gains and may be able to reallocate the loss elsewhere within its group (subject to the usual conditions);

2. any other losses available to the non-resident company would be available to use against any gain arising under the new rules; and

3. for non-residents subject to CGT there will be no distinction between gains and losses arising on residential and commercial property (so that, for example, losses under the existing NRCGT regime can be used against gains arising on commercial property under the new regime).


The non-resident may, by election, compute the loss or gain arising on disposal using its acquisition cost (rather than rebased value as at April 2019) as its base cost in the UK property.


Indirect disposals


A completely new aspect of the proposal is the plan to impose a UK tax charge on gains realised on disposals by non-UK residents of interests in entities that themselves hold UK real estate (so-called "indirect disposals").


For the new tax charge on indirect disposals to apply from April 2019:

1. the entity being disposed of must be "property rich". This will be the case if, at the time of disposal, at least 75% of the value of the interests disposed of is derived from UK land (whether directly or indirectly, and whether residential or commercial). The test is applied to the gross-asset value[11] of the entity in question, using the market value of the assets at the time of disposal; and

2. the non-resident making the disposal must hold at least a 25% interest in the entity. Interests held by parties related to the non-resident will be taken into account. This test will also be met if at least a 25% interest has been held within the 5 years ending on the date of disposal.


As proposed, the new indirect disposal UK tax charge would be triggered upon disposals by non-residents of UK "property rich" shareholdings, partnership interests, interest in settled property and options.


The Consultation Document describes the purpose of the 25% ownership test as to exclude from the scope of the new charge those smaller investors who are unlikely to have control or influence over the entity's activities (and who, indeed, may not even be aware of the nature of the underlying investments). However:

1. introducing a 5-year lookback period will ensure that indirect holdings cannot be fragmented prior to any (UK tax-free) final disposal. This will be a mechanical test, without consideration as to motive. It is explicitly recognised that, as a result, periods prior to April 2019 may need to be considered for the first 5 years after the new charge takes effect[12]; and

2. it is proposed that a wide definition of "related" parties be applied (in determining whether the 25% threshold is reached). This would, for example, include cases "
where persons come together as a group with a common object in relation to the envelope entity".


As part of the proposal for indirect disposals, an "anti-forestalling" rule took effect from 22 November 2017. This anti-avoidance rule can be taken as a further sign, if needed, of the certainty of the proposal. The target of this rule, broadly, are arrangements which exploit certain double tax treaties and which are carried out after this date for a main purpose of avoiding tax which would otherwise arise to non-residents under the new rules taking effect from April 2019. Those UK double tax treaties which concern HMRC are those which do not currently include a provision similar to that in Article 13.4 of the OECD Model Convention[13] and which, therefore, do not allocate taxing rights to the UK upon disposal by the non-UK resident of "property-rich" entities.

Collective investment vehicles

The Consultation Document highlights investment by non-residents in UK commercial real estate through collective investment vehicles (CIVs) as an area in need of particularly careful consideration.

Broadly, under the proposals it is intended that the "indirect disposal" tax charge would apply equally to non-residents disposing of interests in (UK tax-exempt) real estate investment trusts (REITs) and other UK CIVs. There are, however, no plans to change the UK tax treatment of the UK CIV itself, so that direct disposals of UK real estate by the UK CIV would continue to be exempt from UK tax.

Non-UK CIVs which, currently, escape UK tax on gains on UK real estate disposals solely by virtue of being non-UK resident, would as proposed be caught by the new direct disposal tax charge from April 2019.

The UK's "substantial shareholding exemption"[14] (or SSE), as amended with effect from 1 April 2017, may, in its now-expanded form and subject to the meeting of strict conditions, mean that the proposed new UK tax charge on "indirect disposals" of property-rich companies may not arise if the selling non-resident company is owned by "qualifying" institutional investors[15]. Such qualifying institutional investors, for SSE purposes, include pension schemes, life assurance businesses, sovereign wealth funds, charities and certain investment funds.

Practical issues

The UK tax authority itself recognises that this new, extended, tax regime is likely to bring associated compliance and enforcement challenges. Whether deliberately or through lack of awareness, HMRC expect that some non-residents caught by the new rules will fail to report and pay UK tax on in-scope disposals.

It is therefore proposed that certain UK-based advisors will also be obliged to notify HMRC of the disposal. It would appear that this would only apply to "indirect disposals" and the UK advisor would only need to report an indirect disposal to HMRC if, within 60 days of the disposal taking place, the advisor is not able to "reasonably satisfy" themselves that the non-resident itself has reported the disposal to HMRC.


The proposals do indeed represent a fundamental change to the UK tax rules on gains from UK real estate. However, given recent developments in this area it is arguably not an altogether unexpected development.

Although described as a consultation it is clear that the policy decision has been made to remove the remaining key UK tax advantage for holding UK real estate offshore. Any further developments between now and April 2019 will relate to the precise scope of the new rules. Given the obvious criticism – that in a time of some uncertainty as to the future position of the UK as a place for investment, this move may make the UK real estate market less attractive for overseas investors – it remains to be seen whether any substantive exclusions (in particular for CIVs) can successfully be lobbied for.


[1] As part of the Autumn Budget 2017.

[2] As applicable.

[3] Note that non-residents carrying on a trade in the UK through a UK permanent establishment are taxed in the UK on sales of UK property used in that trade and, since 6 July 2016, non-residents (i) dealing in UK land, or (ii) developing UK land for the purpose of disposing of it, are also subject to UK tax.

[4] Namely a company controlled by five or fewer "participators" (a wide definition, including shareholders and loan creditors).

[5] As at the time of writing.

[6] Ie not "closely-held" company.

[7] Though subject to rules for dealing in, or developing with a view to sale, UK land.

[8] 1 April 2019 for companies, and 6 April 2019 for other persons.

[9] Falling to 17% from April 2020.

[10] Ie a disposal from their own ownership.

[11] Ie excluding liabilities such as loan finance.

[12] Although any resulting charge would be limited as a result of the operation of the rebasing rule.

[13] 2014 version. According to the Consultation Document, some UK double tax treaties omit this provision altogether whilst others include it but only in respect of shares (and not partnerships or trusts) and/or only in respect of direct and not indirect disposals of "property rich" entities.

[14] The UK's 'participation exemption'.

[15] The expanded SSE may provide for full exemption, if the non-resident company is held at least 80% by qualifying institutional investors. Between 25-80% and the exemption may be partial.


[*] Ben Roberts is a senior associate in the Corporate Tax team at RPC. He can be contacted at ben.roberts@rpc.co.uk.


Wednesday, April 25, 2018