This Focusing on Funds looks at three proposed changes for overseas owners of UK real estate including holding entities and funds. The first change is a tax charge on capital gains on disposals and the others are anti-money laundering proposals. These include the registration of overseas legal entities and some trusts holding UK real estate with details of their owners.
Impact for Funds and Investors
Changes such as these increase compliance and taxation obligations and increase costs. They also potentially affect UK activity. These types of change are not unique to the UK and we have previously commented on other European proposals affecting cross-border ownership.
The changes will require investors and funds to consider their structures.
Non-resident capital gains tax on UK real estate
As announced last year, there is now proposed legislation to bring non-residents within the scope of UK tax on gains on investment in UK real estate. The change is to apply from 6 April 2019 and any gain is to be based on increased value as calculated from that date.
The change will impact non-resident owners although those with a general exemption from UK tax such as certain overseas pension funds and sovereign wealth funds are looking to be outside direct scope.
Property rich vehicles
The legislation will also extend to indirect disposals of "property rich" vehicles. These are vehicles which derive, directly or indirectly, 75% or more of their value from UK real estate. The new charge will not apply where an investor holds less than 25% of the vehicle with a look back over a two year period. The 25% test will not apply to collective investment vehicles that have elected for special status as described below.
Investors will also need to consider double taxation treaties for any UK taxing right. The UK / Luxembourg treaty does not currently give the UK such a right in these circumstances.
The Government has acknowledged that the proposals cause concerns for exempt investors, such as UK pension funds which may become subject to tax where they invest through offshore structures, and concerns over creating multiple layers of tax. It plans to address this through a collective investment vehicle ("CIV") regime.
The Consultation Response includes principles for awaited further draft legislation for the CIV regime as mentioned for our briefing event opposite.
CIVs such as offshore property unit trusts are expected to be able to elect to be treated as being tax transparent under the proposed changes. The 25% holding requirement would fall away and all investors would be deemed to hold a share of the underlying property, as with a UK limited partnership. For UK tax exempt investors no capital tax should arise.
A further elective regime will be available for funds to be treated as tax exempt. Again the 25% threshold would not apply, and capital gains tax (if any) would arise to investors on disposal of fund interests or distributions of capital proceeds. The exempt CIV regime will come with increased reporting (and possibly) withholding requirements for fund managers. Exempt status will benefit tax exempt investors but will increase compliance obligations for all investors.
The new overseas land owners register and legal owners
The draft Registration of Overseas Entities Bill (the "Bill") is aimed at creating transparency and combating money laundering. The register is intended to be operational in 2021. Failure to comply is a criminal offence for the entity and its officers at fault. Overseas entities should consider their current, and proposed, UK real estate ownerships to understand the impact on their organisations.
The Bill proposes to require an overseas “legal entity” (not natural persons) holding UK real estate to:
- register on a public register at Companies House;
- include details of those who own and control it;
- confirm and update its registration annually; and
- provide its unique overseas entity ID details to the Land Registry to acquire, sell, grant registrable leases or charge its land.
The draft Bill includes possible exemptions and the consultation refers to possible other exemptions such as for foreign governments and public authorities. It will therefore be necessary to assess structures and whether entities have legal personality under their governing law. For example, a unit trust is not a legal entity but the trustees usually are.
Their beneficial owners
The overseas entities that are in scope must register their beneficial owners. These are determined in the same way as under the current People with Significant Control (PSC) register of beneficial owners of UK legal entities. Broadly, beneficial owners are individuals, legal entities (that are subject to their own disclosure requirements), government or public authorities that meet one or more of these criteria (and are not exempt) which:
- hold (directly or indirectly) more than 25% of the shares and/or voting rights in the overseas entity;
- can appoint or remove a majority of the board of directors of the entity; and/or
- have the right to exercise (or is in fact exercising) significant influence or control over the entity.
There are exemptions for beneficial owners who hold their interest through holding vehicles which are subject to their own disclosure requirements such as UK vehicles on the PSC register, overseas holding vehicles which are registered in this overseas owners register and companies listed on a regulated European market. Limited partners of a UK limited partnership and “foreign limited partners” (participating in arrangements established under non-UK law which will be specified by regulations) will not be deemed to be beneficial owners of overseas entities. This will be helpful for institutional investors that typically are limited partners.
Current foreign ownership of UK land
The registration requirement will also apply to overseas entities that currently own UK registered land, where they became proprietors of UK registered land on or after 1 January 1999. These overseas entities will need to become registered under the new regime within 18 months from the effective date of the legislation. This requirement does not apply to “exempt overseas entities” which will include foreign government and public authorities.
Fifth Anti-Money Laundering Directive (MLD5)
The EU’s MLD5 will extend the existing trust registration requirement to all non-UK trusts that own UK real estate, such as JPUTs, even if their trustees have not yet had to pay UK tax. HM Treasury is planning to publish a policy consultation in Winter 2018/19, followed by a consultation on draft legislation in Spring 2019. The expected implementation deadline is around Jan/Feb 2020, after the UK is expected to leave the EU, but this measure may potentially apply to the UK if there is a Brexit transition period.