Budget 2017 - capital gains tax for non-residents

Many of you will be aware that in the Budget on 22 November 2017 the Chancellor announced changes to the taxation of capital gains on real estate disposals by non-residents. These changes are likely to impact many real estate funds.

The rules introduce tax on gains on the disposal of commercial property by non-UK residents for the first time.

What is the change?

Currently most disposals of UK property by non-resident investors are not subject to UK tax. The disposal by non-residents of some residential property is already subject to UK tax but, in practice, there are exemptions for widely held non-resident investors and where residential property is part of a property rental business which means this is not usually an issue for funds.

The proposed change would make the disposal of UK real estate by most non-resident investors subject to UK tax.

It is also intended that the disposal of interests in “property rich” companies by non-UK residents would also be subject to UK tax.


The proposal is that the rules will apply from April 2019.

Whilst many details appear fixed, there are other details open for consultation - that consultation closes on 16 February 2018.

Some detail

From April 2019 capital gains tax will apply to all UK real estate disposals including commercial property.

Any gains prior to April 2019 will not be subject to tax. For direct property investments there is an ability to elect to use the original cost rather than rebasing at April 2019 where that is advantageous.

“Property rich” companies are those where 75% of the gross value is derived from UK real estate. Under the proposed rules, disposals by non-UK investors would only be caught where they, together with connected parties, hold (or have held in the previous 5 years) a 25% interest in the entity.

Any exemptions?

There is an expectation that targeted exemptions may be introduced for pension funds. The detail of this is awaited.

Additionally, there may be protection under some double tax treaties (such as the UK-Luxembourg treaty) on indirect property disposals whereby the taxing right remains outside the UK. It is thought that these treaties will be renegotiated over time but there may be some protection for structures in the short term.  It is, however, important to note that there will be anti-forestalling measures aimed specifically at the use of double tax treaties.

Implications for AREF members

The change in rules is likely to affect Jersey and Guernsey Property Unit Trusts and non-UK domiciled property holding companies commonly used in the real estate industry.

Where there are multiple levels of structure there is a risk that tax on capital gains could apply more than once- particularly where proceeds from asset sales are reinvested.

There may be situations such as where UK pension funds invest via JPUTs or equivalents the change in rules will introduce an effective tax cost for the pension fund unless a targeted relief is included.

For new fund launches, UK fund structures such as REITs or Property Authorised Investment Funds may be preferred in some circumstances. However, it is expected that offshore funds will continue to be appropriate in some cases.

Existing funds may want to consider restructuring depending on the impact of the rules in the particular circumstances.

It is, however, important to note that there are a number of anti-avoidance / anti-forestalling provisions that need to be borne in mind when considering alternatives.

AREF responded to HMRC & HMT's consultation

Capital Gains Tax legislation was released on Friday 6th July 2018

  • View the event summary from the AREF roundtable discussion events in January 2018
  • View the slides from AREF's Capital Gains Tax Training event in March 2018