While UK real estate has long been a prominent feature on the investment landscape, the new rules being introduced next month in the form of the revamped non-resident capital gains tax (CGT), affecting both companies and individuals, may cause many foreign investors to look to alternative options.
I have discussed previously the now-imminent changes – first announced by UK Chancellor Philip Hammond on 22 November 2017 with the broad aim of aligning the tax treatment of non-residents with that of residents – as well as their implications for the funds industry in respect of real estate investments and structuring. To provide a very quick recap, under the new regime (effective from April 2019) CGT will be applied to:
- Both commercial and residential property (previously just residential)
- All non-residents (removing previous exemptions for certain non-widely-held companies)
- Indirect disposals (such as sale of shares in a company that owns UK property).
Impact on CIVs
These new rules will almost certainly have an impact on the funds industry, and the UK government acknowledges that collective investment vehicles (CIVs) give rise to specific concerns and complexities. This includes pension funds, which have traditionally invested in UK property via offshore property funds structured to be transparent for income and exempt from capital gains.
Many such CIVs operate through Jersey, which has a long and successful track record as a leading funds jurisdiction. Jersey responded to the public consultations and liaised with HMRC and industry bodies with the aim of (i) protecting the status of both UK and foreign exempt investors (such as pension and sovereign wealth funds) investing through Jersey, and (ii) ensuring that investment in UK property through Jersey vehicles – in particular fund structures and the property unit trusts known as JPUTs – does not give rise to any double taxation.
Electing for relief
As a result, new legislation was included in the UK Finance Bill on 7 November 2018 on how these rules apply to CIVs, providing for two types of elections that a CIV could make:
The transparency election
- Allows the treatment of an offshore CIV as a partnership for capital gains purposes, so that investors are taxed on disposals of the underlying assets of the CIV
- Is only available to CIVs that are income-transparent, such as a JPUT
- Cannot be withdrawn once made.
This election is likely to be preferred by CIVs in the form of smaller joint venture arrangements with predominantly exempt investors, as opposed to funds where regular changes of investors are expected. For instance, an unregulated fund investing in UK property through a Jersey special purpose vehicle (SPV) could consider restructuring the SPV as a JPUT to elect itself into this category. Alternatively, a regulated fund investing in UK property from Luxembourg could consider using a JPUT for UK real estate investments going forward.
The exemption election:
- Allows eligible CIVs (which meet certain qualifying conditions and commit to report certain information annually to HMRC) an exemption for the CIV itself and for entities in which it has at least a 40% investment
- Is only available to CIVs that are UK property rich
- Requires that investors are chargeable on their gains on disposals of their interests in the CIV
- May be revoked by the relevant fund manager by giving notice to the HMRC.
This election is likely to be used mainly by widely-held funds with large structures, and, again, particularly where the investors are exempt.
Looking to the future
As our clients seek to come to terms with these new arrangements, we at IQ-EQ – with our extensive real estate and funds expertise and solid presence across the UK and Crown Dependencies – will be at the forefront of offering new solutions for international investors and fund managers as of 31 March. Our understanding of the market indicates that both aforementioned elections will be widely embraced by existing structures that qualify for such relief, and we are ready to assist our clients and implement whichever option is best suited to their needs.
See you at MIPIM?
This week I will be in Cannes as part of our Group’s international real estate team. Should you also be attending MIPIM, please don’t hesitate to get in touch to arrange a meeting. My colleagues and I would welcome the opportunity to discuss your UK property holding structure and explore the options available to you, or simply gain a broader understanding of the implications for your property business.