Executive summary

  • The UK Government intends to tax gains realised by non-UK resident investors in UK real estate that accrue from April 2019.
  • The charge will apply to gains realised directly or indirectly (including via disposals of interests in property holding companies, unit trusts and other vehicles) in residential and commercial property.
  • For commercial property (and in some cases residential property), these gains have not previously been taxable in the UK for non-UK residents.
  • The UK Government has also confirmed that UK rental income will, in the hands of a non-UK resident investor, be charged to UK corporation tax, with consequences including that the UK’s new interest barrier could restrict deductions for investor-level debt.


This is a significant extension to the UK’s existing regime for taxing non-UK residents on gains from UK real estate, which currently only applies to direct disposals of UK residential property – and then only in particular circumstances. The British Property Federation has already expressed deep concerns about the effect on attracting overseas capital into developing UK real estate. The Government announced targeted exemptions for certain institutional investors, but it is not yet clear how far these will extend beyond the UK’s current participation exemption (which was widened in some respects for certain institutional investors this year) and other existing exemptions (such as the exemption for overseas pension schemes).

The change was announced on 22 November as part of the Autumn Budget 2017, and came as a surprise to the industry. Although the Government is consulting on aspects of the proposed changes, it has said that the scope, commencement date and other core features of the changes are already fixed. And the Government has announced the introduction of an anti-forestalling rule (with effect from 22 November) intended to prevent treaty shopping to get around the changes.

How will the tax be charged?

The intention is only to capture gains accruing after April 2019. This is to be achieved by re-basing the relevant assets for UK tax purposes as at that date.

For any post-April 2019 gain, a non-UK resident will be taxed on the basis on which it would have been taxed (and at the rate at which it would have been taxed) if it had been UK resident. So a non-UK resident company will be subject to UK corporation tax (currently 19 per cent for main-rate payers), and other types of non-resident investors will be chargeable to UK capital gains tax (it is not yet clear whether this would be at the ‘upper rate gains’ rate, currently 28 per cent, or the lower rate for other gains, currently 20 per cent – although the upper rate seems more likely because that is the rate that currently applies where non-UK residents are subject to UK tax on gains from UK real estate).

It follows that losses (including in UK resident entities elsewhere in the investor group) and exemptions may be available to mitigate the charge.

How does the charge on indirect disposals of UK real estate work?

In many cases, a non-UK resident investor will hold UK real estate through a special purpose vehicle (often a non-UK company or unit trust) and will prefer to exit that investment through a disposal of the shares or units so that the purchaser does not incur the charge to UK stamp duty land tax that would arise on a transfer of the property directly, at rates of up to 5 per cent of the consideration for commercial property. (The consultation on the charge on gains does not discuss any change to the current scope of UK stamp duty land tax.)

In working out whether a non-UK resident making an indirect disposal of UK real estate in this way will now be chargeable to UK tax, the two key tests are whether the entity is ‘property rich’ at the time of the disposal and whether the non-UK resident investor has (or has had – see below) a 25 per cent or greater interest in that entity.

To be ‘property rich’, 75 per cent of the gross assets of an entity must derive, directly or indirectly, from UK real estate. This requires tracing down through other entities owned by the entity being disposed of.

The 25 per cent interest test is intended to exclude smaller investors. To prevent mitigation of the charge by short-term staggering of disposals, or by fragmenting the investor’s interest in the ‘property rich’ entity so that no single selling entity owns 25 per cent, the test takes into account interests held in the five years up to the date of disposal and requires the aggregation of interests in the vehicle held by related parties. For these purposes, the definition of who is related is very wide. For example, partners in a partnership will be treated as related to each other.

Treaty override?

Although the intention is to bring all direct and indirect disposals of UK real estate by non-UK residents within the charge, the Government acknowledges that some non-UK resident investors will be entitled to treaty relief where, for example, the relevant treaty does currently not permit the UK to tax gains on disposals of interests in vehicles that derive the majority of their value from UK real estate, or does not permit the UK to tax gains on disposals of interests in such vehicles unless they are companies, or does not permit the UK to tax gains on interests in property holding vehicles that derive their value only indirectly from UK real estate.

However, the UK is expected to move to amend treaties (including the treaty with Luxembourg) that do not grant it full taxing rights in this area, and in the meantime the anti-forestalling rule mentioned above, and a new targeted anti-avoidance rule accompanying the changes, are intended to prevent non-UK resident investors from ‘treaty shopping’ by structuring their investments so as to take advantage of treaties that do not permit the UK to tax the relevant UK real estate-related gain.


In broad terms, the Government intends that disposals by non-UK residents of interests in collective investment vehicles holding UK real estate (typically UK real estate investment trusts (REITs), property authorised investment funds (PAIFs) and exempt unauthorised unit trusts (EUUTs)) should be treated in the same way as other indirect disposals of UK real estate – i.e. whether a charge arises will depend on whether the entity is ‘property rich’ and whether the investor meets the 25 per cent test.

What about rental income?

Non-UK resident investors are currently liable to UK income tax on UK rents (subject to any investor-level exemption). The UK Government has said that it will press ahead with changes to make non-UK resident corporates pay corporation tax on that income instead, which could result in further restrictions on the deductions that non-UK resident corporate investors can take into account in computing their UK tax, including under the UK’s new interest barrier and new restrictions on the use of carried forward losses (the latter rules being particularly relevant to developer investors), although as noted above regarding the charge on gains, the change may open up the possibility of surrenders of losses from (or to) other UK corporation tax paying members of the group.

Next steps

The consultation closes on 16 February 2018, with the Government’s response, and draft legislation, expected in late summer the same year. The consultation is available here.