All questions

Asset deals versus share deals

i Legal framework

The UK has an open economy, with no foreign exchange controls or restrictions on foreign investment.

It has tried to dissuade the acquisition of UK residential property by corporates and non-UK residents to address perceived capacity constraints and encourage residential property ownership by UK individuals; however, these measures do not prohibit foreign ownership.

The legal form of a property transaction normally involves a sale and purchase agreement (SPA), which is a private contract. The SPA contains the main commercial terms of the transaction. In Scotland, where a separate property law regime applies, a contract is typically concluded by exchanging formal letters of offer and acceptance, which together form the 'missives of sale'.

The SPA (or missives) may incorporate some industry standard common terms in the case of an asset sale. There are no common terms for share deals.

An asset deal involves an application to the Land Registry (or, in Scotland to Registers of Scotland) to update the title registration, because the buyer takes full legal title only once the register has been updated.

Completion of a share deal normally involves the parties executing an instrument that transfers legal title to the shares.

An important difference between an asset deal and a share deal is that a buyer might be exposed to historical risks in the target company on a share deal. The SPA will contain some protection against this. It is generally common for any warranties or covenants for historical risks to be backed by a warranty and indemnity insurance policy, rather than the buyer having recourse against the seller.

ii Corporate forms and corporate tax framework

The most common entities investors use to hold UK property investments are non-resident corporates (tax opaque), offshore property unit trusts (tax transparent for income purposes and potentially tax transparent for gains made on any disposal) and UK REITs.

As discussed above, there is much flexibility for property holding structures, with the commercial objectives and any special tax attributes of the investor often driving the structure. For example, a tax-exempt investor might prefer a tax-transparent structure to be able to claim a tax exemption. A partnership might suit these requirements; however, the buying and selling of partnership interests in a partnership that owns property might trigger property taxes. Therefore, the use of a partnership might be fine for a sovereign that intends to hold the property for its entire lifespan, but it might be less efficient if more frequent sales are anticipated, because, often, a purchaser will take any property transfer taxes into account when pricing.

iii Direct investment in real estateAcquisition

Property transfer taxes and VAT may apply when buying UK land.

Ordinarily, supplies of land are exempt from VAT; however, a seller can bring commercial property within the scope of VAT by opting to tax it. A seller might wish to opt to tax the land to recover VAT they have incurred in respect of the property. For example, an investor is likely to do this to recover the VAT incurred in respect of the costs of acquiring and managing a property. Sales of the freehold in new build commercial properties are also automatically subject to VAT for a period of three years from practical completion.

There are a couple of exemptions to remove a sale from the scope of VAT. First, if certain conditions are satisfied, the sale can qualify as a transfer of a business as a going concern (the TOGC regime).The primary example of this is when the seller is selling a property that has been leased to a tenant. The TOGC regime minimises VAT fraud, given the potentially large sums representing VAT that would otherwise need to be paid. Second, there is an anti-avoidance regime that can disapply the seller's option to tax in certain scenarios.

The acquisition of an interest in land can also be subject to property transfer tax, which takes the form of stamp duty land tax, land transaction tax, or land and buildings transaction tax, depending on whether the property is located in England, Northern Ireland, Wales or Scotland.

UK property transfer tax is paid on top of the consideration, including any VAT, so if VAT is charged at 20 per cent, it will increase the UK property tax that the investor must pay.

All three taxes have different rates for commercial property and residential property. Rates for residential property are higher and may increase further in certain situations (e.g., when the purchaser is a company or is not resident in the UK). In all cases, tax is charged on all the consideration given to acquire the property, including non-cash consideration such as development works or the exchange of other land.

There are some exemptions and reliefs depending on the purchaser (e.g., if it is a charity) or the type of transaction. Transactions that may benefit from relief include:

  1. the movement of a property within a corporate group;
  2. sale and leaseback transactions; and
  3. Islamic finance transactions.

There are also some other measures to reduce the property tax that is potentially applicable if, for example, the investor is acquiring multiple residential properties at the same time from the same seller.


During the holding phase, the investor is generally subject to UK tax on the rental income it receives. The broad position is that, irrespective of the location of the investor, an individual will pay income tax on rental profits (the top rate is currently 45 per cent or, for Scottish taxpayers, 47 per cent) and corporate investors will usually pay corporation tax on those profits at the main rate of 25 per cent.

When an investor is not UK tax resident, a withholding tax regime applies to payments of rent made by the tenant. This is called the non-resident landlord scheme. It requires the tenant or UK-based letting agent to withhold 20 per cent of the rent and pay that directly to the UK tax authority. It is possible for the investor to obtain a direction from the tax authority so that they receive rent payments on a gross basis. Any withholding tax collected is credited against the income tax or corporation tax charge that the investor must pay.

When computing the profit that is subject to tax, different rules apply depending on whether the investor is subject to income or corporation tax. Generally, most non-UK investors are likely to hold property via a vehicle that is subject to corporation tax.

The corporation tax rules typically begin with the accounting treatment and then overlay certain rules on top that introduce different rules for tax depreciation and deductibility of certain expenses. For example, an expense is deductible for tax purposes only if it has been incurred for the purposes of the investor's property rental business.

There are also rules that disallow or limit the amount of interest that is deductible for corporation tax purposes. These rules include transfer pricing, the corporate interest restriction, rules relating to limited recourse debt, the anti-hybrid rules and tax avoidance rules. In relation to the corporate interest restriction, there is an exemption for the third-party finance expenses of certain UK real estate-owning companies if conditions are satisfied. This is a very important exemption because property-owning companies are often highly geared with third-party bank debt, so interest deductibility is important.

An investor will often have debt financed the acquisition. The UK imposes withholding tax at 20 per cent in relation to yearly interest payments that have a UK source and where a loan is secured on UK real estate, this is usually the case. An investor will need to establish whether it must withhold in relation to the interest payments it makes and, in particular, whether the lender is able to benefit from any withholding tax exemptions or reliefs. Generally speaking, most lenders are able to benefit from some form of exemption; however, this might not always be the case.

Although the investor's accounting profit will take account of any depreciation, UK corporation tax does not allow any deduction for such depreciation. Instead, the UK operates an alternative tax depreciation regime called capital allowances.

A property rental business qualifies for this regime, and capital allowances are allowed for certain types of capital expenditure. There are two main rates, depending largely on the expected lifespan of the relevant asset: the main rate is aimed at assets with a shorter lifespan and is 18 per cent; assets with longer lifespans typically fall within the long life and integral features pools with a yearly allowance of 6 per cent (the special rate). The way this works is that, when acquired, an asset is added to the relevant pool and each year the relevant pool may be written down by either 18 per cent or 6 per cent. During its 2023 Spring Budget, the UK announced that for certain types of expenditure it will introduce a temporary expensing regime that will apply through to 31 March 2026, allowing companies a 100 per cent first year allowance for main rate expenditure and a 50 per cent first year allowance for special rate expenditure.

There is also a structures and buildings allowance (another form of tax depreciation) that provides a 3 per cent per annum deduction over a period of 33.3 years.

If the investor undertakes work to the property, it may also be subject to the construction industry scheme withholding tax regime, which essentially requires withholding tax on certain payments to subcontractors.


The key consideration for the investor when selling a property is whether it will be required to pay tax on any proceeds it receives from the sale.

The general thrust is that, when a non-UK investor sells a property, it will be paying either CGT or corporation tax on any gain that it makes (other than the limited class of investors that might be exempt from tax, such as sovereigns, pension funds or charities). UK investors have since 1965 been subject to tax on any gains made.

Precisely how much of the gain is subject to tax by the non-UK investor depends on the nature of the property, because residential property was brought within this regime before commercial property. The broad takeaway is that calculating a gain on residential property can be more involved than for commercial property, given the various changes in law that have occurred during the past 10 years, whereas for commercial property it is typically just the gain that has arisen since April 2019 that is subject to tax unless the investor elects otherwise.

An investor selling real estate will need to establish whether it must charge VAT on the sale. In this respect, the same considerations apply as discussed above for the acquisition.

iv Acquisition of shares in a real estate companyAcquisition

There are no property transfer taxes when buying a company. Similarly, there is no VAT.

If the company is a UK company, the acquisition will attract stamp duty at 0.5 per cent of the consideration (rounded up to the nearest £5). This is one reason for the popularity of non-UK corporate vehicles for holding UK property, as a charge of this kind does not arise often.

Tax considerations can be relevant when pricing a share acquisition:

  1. a purchaser may seek to discount the price to take account of any latent capital gain that the company might have in relation to the property asset were it to sell it directly; and
  2. similarly, the seller might wish to share in some of the upside that the purchaser might obtain from not paying property transfer tax.

Rental and similar profits from the property are taxed within the property-owning entity in a manner outlined in the context of a direct acquisition.

The UK does not impose dividend withholding tax other than for certain distributions by REITs or property authorised investment funds (PAIFs) (see below).

Yearly interest on shareholder loans attracts an interest withholding obligation when it has a UK source (which it commonly would do if paid by a UK-incorporated company or secured on UK real estate, or a combination of these).

Dividends paid to a UK resident company are subject to corporation tax in principle but are generally exempt in practice under the UK dividend exemption, unless the dividends come from certain vehicles such as REITs. This means that profits can generally be extracted as dividends to a UK resident company without suffering additional UK tax if (unusually) a UK resident company is the acquisition vehicle.

Sale phase

The UK imposes a tax on the sale by non-UK residents of shares or interests in a property-rich vehicle. Broadly, this means an entity if at least 75 per cent of the gross market value of its assets derives from UK real estate. Therefore, if an entity holds just one UK property, that entity in isolation is likely to be UK property-rich. The rates are the same as for UK resident investors.

Unless the relevant entity is a collective investment vehicle, gains are taxable only if the investor (together with any connected persons) holds interests in the vehicle of 25 per cent or more. This means that smaller holdings in entities that are not collective investment vehicles will sometimes fall outside the scope of UK tax.

There are some exemptions to this general approach, but the exemptions are rather limited in scope.

Tax on non-resident gains can cause complexity in a funds context, as sale proceeds could potentially be taxed at multiple levels as the proceeds are extracted to investors. To mitigate this risk, the rules allow certain vehicles to elect to be treated as partnerships (i.e., transparent) or exempt for the purposes of non-resident taxation on property gains. The elections provide options for real estate funds to structure their UK real estate investments such that, broadly, investors are not subject to a tax cost in addition to what they would have incurred had they invested directly.

A transparent or exempt structure ensures no leakage within the structure, with investors that are themselves exempt (or entitled to credit) being able to maintain the tax profile that they otherwise would have had when investing directly. These options do, however, require investors to file UK tax returns.

In a transparent structure, no reporting obligations are imposed on the vehicles that elect to be transparent. Investors making a disposal will be required to file UK tax returns (as they are within the ambit of the charge), even if it is just to claim exemption from the charge based on their own tax position.

The position with exempt structures is slightly different. Funds making the exemption election must provide information relating to their investors and fund disposals for each accounting period in which they wish the exemption to apply (and the two years prior to the election, or the period since the fund was constituted, if shorter).