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HMRC’s gain is non-residents’ loss: Tax on UK real estate gains for non-UK resident corporates and funds

Our summary of the changes for collective investment vehicles and corporate taxpayers

Historic position

Before 6 April 2015, the UK was a notable outlier in the international community for having no regime for the taxation of gains realised by non-residents on a disposal of UK real estate (except in limited circumstances).

In 2015, the UK took the first step in changing this position by bringing disposals of UK residential property by non-UK residents into charge.  This legislation did not apply to widely held companies and widely marketed investment schemes, commercial property or disposals of property-rich entities (such as companies), and so investors in non-UK funds investing in UK real estate generally continued to fall outside the UK tax net in respect of gains.  Income realised by non-UK resident companies in respect of UK real estate is currently within the scope of UK income tax, but from 6 April 2020 will also come within the scope of corporation tax.

These gaps in the tax net have now been closed, by measures that extend UK taxation to all disposals of UK real estate by non-residents, including indirect disposals.  These new measures apply to disposals on or after 6 April 2019. 

This note focuses on the aspects of the new rules that will be most relevant to corporate taxpayers and institutional investors.  For a discussion of the rules focusing on the position of non-resident individuals and trustees, you can read about direct disposals of UK real estate here and indirect disposals here.

Direct disposals

The new rules mean that all direct disposals of non-residential UK real estate by non-UK residents are now chargeable to UK tax.

Direct disposals of UK residential property by individuals, trustees and closely held entities (e.g. companies controlled by fewer than 5 unconnected persons) on or after 6 April 2015 are chargeable to UK tax. Disposals by widely held entities and widely marketed collective investment schemes (previously excepted from the scope of non-resident capital gains tax) are now also chargeable as a result of this measure.

Indirect disposals

Any disposal of interests in an entity on or after 6 April 2019 meeting the following two conditions is within the scope of UK capital gains tax (for individuals and trustees) or corporation tax (for other taxpayers):

  • the entity is “property-rich” (which will be the case if 75% or more of its gross asset value derives from UK real estate); and
  • the non-resident (taken together with connected persons) holds, or has at some point in the previous two years held, a “substantial indirect interest” in the land (broadly, at least a 25% interest in the entity). 

Determining value

An asset derives at least 75% of its value from UK land if: (1) the asset consists of a right or an interest in a company; and (2) at the time of disposal, 75% of the total market value of the company’s “qualifying assets” derives from interests in UK land.

It is important to note that the reference to a “company” includes other entities that are treated as companies for this purpose (such as Jersey property unit trusts, JPUTs), but for ease of reference this note uses the term company.

Complex rules apply to determine a company’s qualifying assets.  Generally speaking, UK land will always be a qualifying asset.  All other assets will also fall within the definition, save where matched to a related party liability (e.g. a loan receivable due from a group company).

The rules also allow tracing of market value through any number of entities or arrangements (including trusts), but not through a normal commercial loan.  “Normal commercial loan” takes the same meaning as in a group relief context, so broadly meaning loans without equity-like features such as results dependent interest.

“Linked” disposals

It is common to have property assets in separate companies to the main trading activities, both for non-tax purposes (e.g. liability ring-fencing) and for tax purposes.

In principle there is scope for a tax charge on the sale of a trading company and an associated sale of a property holding company, where tax might not be chargeable on the disposal if the business and the property were held by the same company (due to the 75% test referred to above).

However, there is a relieving measure where there are two or more disposals of interests in companies, which are “linked” to each other and where some of the disposals would be caught by the new indirect disposals charge.

In that case, the rules allow you to aggregate the assets of all of the companies being disposed of in applying the 75% test.

Disposals will usually be “linked” if made by the same person (or connected persons) to the same person (or connected persons) under the same arrangements.

Substantial indirect interest

The main rule is that a person has a substantial indirect interest in UK land if the person has a 25% investment at any time in the two years ending with the time of disposal.  That investment can be direct, indirect or a combination.

A person can have a 25% investment by virtue of any one of a number of criteria, including voting power, entitlement to proceeds on a sale, rights to income distributions and rights to capital proceeds on a winding up.  Normal commercial loans (i.e. non-equity like loans) and restricted preference shares (fixed rate preference shares with certain other features) are ignored but all other interests will be taken into account in applying this test.

Holdings by connected persons are aggregated in applying the test but contrary to the usual position under tax legislation siblings are not considered to be connected for this purpose.

Possible ways out of the charge for trading businesses

An exception from the charge on indirect disposals applies where it is reasonable to conclude that all of the company’s interests in UK land are used for the purpose of a trade that has been carried on by the company or a person connected with it throughout the year prior to the date of disposal.

It must also be reasonable to conclude that the trade will continue to be carried on for more than an insignificant period of time in order to qualify, meaning that on disposals to third parties taxpayers should consider obtaining contractual protection that the trade will not immediately cease.

Where a company holds interests in UK land that are not used for trading purposes, the exception will still apply if those non-trading properties comprise no more than 10% of the total market value of the company’s interests in UK land.

In addition to this exception, which was aimed at property-rich trading businesses such as supermarkets and hotels, the existing substantial shareholding exemption (SSE) may well be relevant to disposals of shares in trading companies.  It is broadly available on disposals of shares in trading companies or the holding companies of trading groups where the holding was at least 10% and has been held for a continuous 12 month period in the six years prior to disposal.  Where the disposal is made by an institutional investor, disposals of investment companies can also qualify.

In this context “trading” allows for up to 20% investment activity by reference to the company’s balance sheet, income and management time.  This therefore allows a greater proportion of non-trading activity but is judged by reference to more factors.

Corporate compliance

Entities coming within the charge to corporation tax as a result of this measure (i.e. on a disposal of UK land on or after 6 April) must register for corporation tax within three months. 

Companies pay corporation tax and file corporation tax returns by reference to accounting periods.  Any company not already within the charge to corporation tax will come within the charge to corporation tax on disposal, giving rise to a one day accounting period.  This means that non-UK resident companies that simply hold a UK property (whether let or unlet) as an investment will have a one day accounting period each time it makes a disposal.  From 6 April 2020, non-UK resident companies with let UK property will come within the charge to corporation tax in respect of that income.

A corporation tax return is due twelve months after the end of an accounting period.  Payment of the tax is usually due nine months and 1 day after the end of the accounting period, but large or very profitable companies pay tax more quickly, by instalments.

Any company realising a chargeable gain in excess of £27,397 in a one day accounting period is potentially caught by these instalment payment rules and could be required to pay tax on the date of disposal.  By concession, HMRC will allow companies in this situation to pay within 3 months and 14 days after the end of the one day accounting period instead.

Impact on the funds industry

There has been widespread concern about the impact of the changes on the funds industry, which is a major contributor to the UK real estate market.  In particular, there was anxiety about:

  • the impact on exempt investors in offshore funds, which would suffer UK tax at the level of subsidiaries; and
  • potential for double taxation due to the multiple layers of vehicles commonly employed by funds in holding structures.

These issues were largely addressed during the consultation process.

Overview of the application of the rules to funds

The basic position under the legislation is that offshore collective investment vehicles (other than companies and partnerships) are deemed to be companies for the purposes of UK tax on chargeable gains, with the participants deemed to be shareholders.  This means that all such vehicles will be treated as opaque for the purpose of UK tax on chargeable gains.

Any person making a disposal with an “appropriate connection” to a collective investment vehicle (CIV) is deemed to have a substantial indirect interest in the entity.

Testing when a disposal has an “appropriate connection to a CIV” can be complex, but for example this will be the case on a disposal by a CIV, disposals of rights or interests in a CIV and disposals by partners in a partnership CIV.

This means that almost all disposals by, or of interests in, UK property-rich funds are caught by this measure regardless of the size of the interest that the investor has in the fund.

Where a fund is genuinely diversely owned (or for companies, widely held) and the prospectus does not envisage more than 40% of the expected market value of investments to derive from UK land (directly or indirectly), then the appropriate connection rule is switched off.  This will be useful for pan-European real estate funds which may inadvertently become UK property-rich.

The two main provisions that are intended to provide relief to real estate funds are as follows:

  • the fund can elect to be treated as transparent for the purposes of UK tax on chargeable gains; or
  • the fund can elect for special tax exemption, as long as certain conditions are satisfied.

Although the substantial indirect interest test is switched off, in order to be chargeable the entity must still be UK property-rich under the 75% test discussed above.

Tax transparency election

Offshore funds that are income tax transparent (such as JPUTs established as Baker trusts) will be eligible to elect for the fund to be treated as tax transparent for the purpose of UK tax on chargeable gains.

This has the effect that non-UK resident investors will be treated as owning a share of the properties (or property holding companies, as applicable) directly.  When such investors dispose of their interests in the fund, they will be taxed on the value of the property less the proportionate original acquisition value of the property.  This treatment is likely to be particularly useful for smaller, simpler fund structures with tax exempt investors.

This election will be irrevocable and unanimous investor consent must be sought at the time it is made.  There is a time limit for making this election: within 12 months of the fund first acquiring direct or indirect interests in UK land (or for funds already in existence at 6 April 2019, by 5 April 2020).

This election continues to have effect even if the investors change or the fund ceases to be UK property-rich.

Exemption election

The alternative, and possibly more attractive, solution is for the fund to elect to be exempt from tax. This election can be made by an offshore CIV (specifically defined in the legislation and including a JPUT, for example) or by companies (including UK companies) at least 99% owned by a partnership or co-ownership authorised contractual scheme.

The election exempts direct and indirect disposals by the qualifying fund or company.  In addition, where the exempt fund or company has a 40% or greater investment in another entity then the appropriate portion of the gain accruing to that entity is also exempt.  For example, if an exempt company has a 50% interest in another company, that other company will be exempt as to 50% of its gains. The 40% investment is tested by reference to the same criteria as explained above for the substantial indirect interest test.

It will be particularly useful for larger, more complex fund structures, but may be too complex and costly from an administrative perspective for other funds.

Detailed conditions must be met in either case (for example, that the entity is UK property-rich and other conditions relating to the ultimate owners), and reporting of investor disposals is required once the exemption takes effect. The election must be made by the fund manager.

While the election has effect, the CIV itself is exempt (or the 99% owned companies, if relevant) together with any fund vehicle in which the CIV has at least a 40% investment, but the exemption is only applicable to the CIV’s proportionate holding.

This election remains revocable (by both the fund manager and by HMRC in certain circumstances, most likely in avoidance cases). In due course HMRC will publish forms to use for this purpose.

If an income payment is made to investors (which is not taxable in their hands), the election is revoked or the conditions cease to be met then a deemed disposal and reacquisition of the interests of the investors in the fund (or the interests of the investors in the company, if the exempt entity is a company) will arise, giving rise to a chargeable gain or allowable loss.

In the case of a breach, this deemed disposal does not occur if the breach of the conditions is remedied within 30 days (with a maximum of four such breaches in any rolling 12 month period). However, a deemed disposal and reacquisition always arises if the condition which ceased to be met was the 75% property richness condition. There is also a 9 month temporary breach period, which enables the fund to retain its exemption if it intends to (and does) cure the breach, but unlike for the 30 day cure period a deemed disposal will still occur even if the breach is remedied.

In some circumstances tax due on these deemed disposals is deferred (for example, until money is paid to the investor or the fund is wound up.

On leaving the regime, there is a market value rebasing of the UK land owned at that date (save where the fund/company leaves the regime by reason of HMRC revoking the exemption), but only where the exemption election has had effect for at least five years and the assets have been held for and covered by the election for at least a year.


The taxation of gains made by non-UK residents on UK real estate represents a major shift of tax policy, but is an unsurprising move on the part of the government.

The government listened to concerns of industry during the consultation period and the new rules contain a number of provisions that are helpful to taxpayers, particularly trading groups and real estate funds. However, there are (as is always the case with complex legislation) potential devils in the detail.

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