Luxembourg-UK Double Tax Treaty
A new Luxembourg-UK double tax treaty (DTT) came into effect from 1 January 2024 (for taxes withheld at source) and 6 April 2024 (for UK income and capital gains taxes). This aligned the treaty with other UK treaties in terms of not providing an exemption from the UK Non-Resident Capital Gains Tax (NRCGT) rules for indirect disposals of UK property. The changes meant that Luxembourg investors disposing of interests in UK property rich companies (either directly or indirectly via certain fund structures) fall within the NRCGT regime. No grandfathering provisions will apply.
When introducing the NRCGT rules there was included a clause that structures, established after the announcement of the rules, with a main purpose of obtaining a tax advantage via a double tax treaty would not benefit from such an advantage, and it was also flagged clearly by HM Treasury that they would be looking to amend the treaty. Accordingly the main impact of this change was on arrangements entered into before 22 November 2017.
The treaty also included a protocol extending the benefits of the treaty to Luxembourg funds and other collective investment vehicles which are either UCITS or for which at least 75% of the investors are equivalent beneficiaries (UK or Luxembourg residents, or beneficiaries of a double tax treaty providing equivalent benefits).
Updated UK Non-Resident Capital Gains Tax Regulations March 2021
In November 2020, HMRC published a consultation on draft regulations to amend the non-resident capital gains rules, specifically to address instances where disproportionate burdens can arise for certain investors introducing a 10% portfolio exemption for non-resident life companies and non UK resident, non-UK property rich CIVs, with retrospective effect from April 2019. The consultation closed on 16 December -The joint response from The Investment Association and AREF can be requested from RE:UK
On 24 March 2021 the amendments to the rules came into force. The Investment Association and AREF lobbied extensively for this exemption for over a year and this is a really positive outcome.
Non-Resident Capital Gains Transparency/Exemption
From February 2020, fund managers are able to make the following elections online:
- Transparency elections for offshore collective investment vehicles under Paragraph 8 of Schedule 5AAA of the Taxation of Chargeable Gains Act 1992;
- Exemption elections for offshore collective investment vehicles under Paragraph 12 (2) of Schedule 5AAA of the Taxation of Chargeable Gains Act 1992; and
- Exemption elections for qualifying companies under Paragraph 12 (3) of Schedule 5AAA of the Taxation of Chargeable Gains Act 1992.
In addition, HMRC have added pages to GOV.UK to give details of the process for making the annual reports required to maintain exemption elections under Paragraph 12 (2) and (3) of Schedule 5AAA of the Taxation of Chargeable Gains Act 1992.
You can find the relevant information, forms and template by going to GOV.UK and searching ‘Transparency and exemption elections for collective investment vehicles’’
AREF's Non-Resident Capital Gains Tax Event March 2019
AREF held an event for members in March 2019 covering:
- The basic non-resident capital gains tax (NRCGT) rules
- Collective investment vehicle (CIV) regime elections
- Practical considerations for asset managers
The slides can be requested from RE:UK.
HMRC Technical Note November 2018
The Government published in November 2018 a Technical Note, along with associated clauses within the Finance Bill, to incorporate the special regime for collective investment vehicles investing in UK property within the wider non-resident capital gains tax rules. AREF welcomed the publication of the Technical Note:
'AREF welcomes the release of the Technical Note, and associated clauses within the Finance Bill, to incorporate the special regime for collective investment vehicles investing in UK property within the wider non-resident capital gains tax rules. These measures should ensure that the tax will be appropriately targeted and should not result in CGT being imposed at multiple levels within investment structures or indirectly imposed on exempt investors such as UK pension schemes, if they invest through collective investment vehicles. The rules take into account a wide range of investment vehicles which are used for investing in UK property. While there remain some practical issues still to be resolved, in particular the reporting and optional withholding regimes which are to be implemented later in regulations, the AREF Tax Committee, which represented members through HMRC technical working groups, thanks the HMRC Policy team for listening to the industry’s concerns and for implementing, based on extensive, open and collaborative dialogue, a practical solution to the issues raised.'
Government's response to consultation: Taxing gains made by non-residents on UK immovable property in Collective Investment Schemes
In July 2018 the Government published a policy paper: Capital Gains Tax payment window for residential property gains. Alongside this was published draft legislation (excluding funds) and the proposed treatment of funds (Annex A of the Summary of Responses).
As a result of AREF's lobbying (and others) the complex issues around pension funds investing in off shore funds was seen to require more thought, as there was no intention to prejudice them, and so there is further consultation on the matter.
AREF welcomed the government’s commitment to build on the detailed consultation responses and discussions with the Industry in respect of how the proposed Non-Resident Capital Gains Tax rules will apply to Collective Investment Schemes. In particular AREF was pleased with the acknowledgement of the importance of avoiding tax for exempt investors and reducing the risk of multiple tax charges within fund structures. These are key points that AREF has previously raised with HMRC and HM Treasury.
AREF would continue to engage with HMRC and HM Treasury to ensure that appropriate solutions are found that work for the Industry whilst also meeting the government’s aims.
Government consultation: Taxing gains made by non-residents on UK immovable property in Collective Investment Schemes
In the budget on 22 November 2017 the Chancellor announced changes to the taxation of capital gains on real estate disposals by non-residents. This was accompanied with a consultation published by the Government on Taxing gains made by non-residents on UK immovable property in Collective Investment Schemes.
The changes were likely to impact many real estate funds. A working group of AREF Tax Committee held informal discussions with HMRC in respect of rules for collective investment schemes and draft legislation.
Roundtable
AREF held a roundtable with members to gauge their views on the Government's proposals.
The Autumn Budget proposed some changes to CGT that could affect the real estate market in the UK materially and the roundtable was another excellent example of AREF representing the collective voice of the real estate funds industry.
Following a brief introduction by AREF CEO, John Cartwright, Cathryn Vanderspar, Partner and Head of London Tax at Eversheds Sutherland and Leonie Webster, Partner at Deloitte LLP gave the background to and overview of the tax changes proposed by the government. They offered preliminary thoughts and suggested some potential issues and considerations that should be discussed.
We were reminded of the £billions that are invested in UK property using Jersey Property Unit Trusts (JPUTS) and the Guernsey and Isle of Man equivalents, from both overseas and domestic investors.
Tax changes to date haven’t affected the institutional property industry materially, unlike these current proposals to tax capital gains (CGT). Cathryn also set out what she believed the government’s aims were, the actual details of the proposed changes and the intended timeframe.
To further help the discussions during the roundtable session that was to follow, Leonie then ran through two interesting case studies for delegates (a UK fund structure and a pan-European fund) to highlight some important considerations and issues that need to be addressed, given the proposed tax changes.
It seems HMRC recognise the significant value of the real estate funds industry, so while the basic proposal is not negotiable, some of the details underpinning this clearly are. HMRC are inviting input to ensure all issues are properly considered and this consultation should be regarded as a genuine opportunity to seek changes where there are demonstrable issues. Feedback through AREF, before the 16th February deadline, preferably supported by circumstantial evidence, should lend greater weight, as numbers count when lobbying. Following the consultation, draft legislation is then expected summer 2018.
During the 40 minutes of vigorous roundtable discussions that ensued (each table chaired by a member of the AREF Tax Committee) delegates used six core questions as a framework to build their feedback around.
The feedback from the roundtables was used by AREF’s Tax Committee for AREF's response to the consultation in February 2018. A copy of this response can be requested from RE:UK.
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