Real Estate Tax Checklist - January 2026

Introduction

Prior to the recent Autumn Budget there had been speculation about the possibility of an overhaul of UK real estate taxes. This did not materialise, but there were plenty of measures highly relevant to the real estate sector, including a 2% increase in income tax on property income, the announcement of a consultation on VAT and social housing and the introduction of a "mansion tax" (albeit at a fairly modest level). In addition, with the publication, last month, of the Finance Bill, we have a pretty good idea of what the new carried interest tax regime will look like. These issues and more are discussed in this briefing, which provides a checklist of the key tax developments of which those in the real estate sector should be aware.

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Real estate vehicle tax

Development	Introduction	Impact
Fundamental reform of the carried interest tax regime from 6 April 2026	From 6 April 2026 all carried interest returns (regardless of their underlying source) will be subject to tax as trading income – so at rates of up to 45% plus 2% NICs. However, “qualifying” carried interest will benefit from the application of a multiplier that will result in only 72.5% of it being within the charge, giving an effective tax rate (including NICs) of around 34.1%. Carried interest will be "qualifying" to the extent, broadly, that it derives from a fund with a weighted-average holding period (AHP) for its assets of at least 40 months. Helpfully, the regime will improve the current rules which can stretch AHPs to ensure they are measured in a commercially realistic manner (known as "T1/T2" rules). Please see our briefing for more detail of the new regime.	The reforms will give the UK the highest effective rate of carried interest tax amongst mainstream EU jurisdictions and give rise to difficult cross-border tax issues. However, the new 34.1% rate may improve the position of fund managers in the real estate sector. This is because it is common for them to be unable to access the current 32% capital gains tax rate, due to a significant amount of their returns being income in nature (e.g. rent) and therefore taxable at rates of up to 45%. Fund managers in the real estate sector will also welcome the fact that non-UK land is to be brought within the T1/T2 rules for "real estate funds" and that helpful new T1/T2 rules are to be introduced for debt investments and credit funds.
Increase in PID withholding tax rate from April 2027	As part of the increase in property income tax rates (see below), the rate of withholding tax paid on property income distributions from UK REITs (real estate investment trusts) and PAIFs (property authorised investment funds) is set to increase from 20% to 22%	Several categories of (particularly UK) investors are entitled to gross payment of REITs (e.g. registered pension schemes and UK companies). However, for other investors the increase in rate will be unwelcome news.
Property richness test for protected cell companies (PCCs)	A PCC is, broadly, a company made up of a number of separate cells where the assets and liabilities of one cell are segregated and protected from those of the other cells. In the Autumn Budget the government announced that, in relation to a PCC, the UK property richness test (which, broadly, asks whether an entity derives more than 75% of its value from UK land) in the UK's non-resident capital gains tax (NRCGT) regime would look at the position of each cell rather than the company as a whole.	This is an anti-avoidance measure designed to tackle avoidance schemes which use PCCs to get out of paying UK NRCGT. However, it will apply in all circumstances where a PCC is used. The change has effect from 26 November 2025 (the day of the Autumn Budget).
Consultation on Land and Buildings Transaction Tax (LBTT) measures for certain fund vehicles	Over the summer the Scottish government consulted on (i) introducing an LBTT exemption for the transfer of units in Co-ownership Authorised Contractual Schemes (CoACS) investing in Scottish property, (ii) providing equivalent (beneficial) LBTT treatment for Reserved Investor Funds (RIFs) as is available for them under SDLT, and (iii) introducing seeding relief for CoACS, property authorised investment funds (PAIFs) and RIFs.	The measures being consulted on would all be welcome improvements to the LBTT regime and encourage investment in Scottish real estate. The consultation has now closed and we await the Scottish government's response.

Bricks and mortar tax

Development

Introduction

Impact

Increase to property income tax rates

Property income tax rates will increase by 2% from April 2027. This will be effected by the introduction of three separate rate bands for property income – the property basic rate (22%),

the property higher rate (42%) and the property additional rate (47%).

These changes will apply in England, Wales and Northern Ireland. The Scottish government will have the ability to set property income rates in line with its income tax powers.

Income taxpayers will be disappointed with the increase, which will also feed through to the rate of withholding applied to (ii) rent paid to non-resident landlords (who do not have HMRC approval to receive gross) which will increase from 20 to 22%, and (ii) PIDs (see above).

"Mansion tax" to be introduced from April 2028

The High Value Council Tax Surcharge (the HVCTS)) will be an additional charge on top of existing Council Tax (and any second homes premium Council Tax) on owners (not occupiers) of residential property in England with a value of more than £2m and will be introduced from April 2028.

The HVCTS will be applied using four progressive bands.

Threshold (£m)	Rate (£)
£2.0 – 2.5	£2500
£2.5 – 3.5	£3500
£3.5 – 5.0	£5000
£5+	£7500

It will be important that care is taken over the design of the new charge, and so it is welcome news that the Government has promised to launch a public consultation early this year. This should cover amongst other things, what reliefs and exemptions will be available and what specific rules will apply for companies, funds, trusts and partnerships holding in-scope properties.

For more information, please see our Budget briefing.

HMRC to consult on VAT and social housing

In the Autumn Budget, the government announced that it would consult on the reform of VAT rules to incentivise the development of land intended for social housing.

No further detail was provided but we understand that the consultation will consider the problems caused by the current rules under which, broadly, zero-rating on development costs is unavailable until a development has reached "golden brick" stage (i.e. beyond foundation level).

The current problems can give rise to cashflow and funding issues for social housing providers, so the consultation is welcome news for the social housing sector.

Tackling construction industry scheme (CIS) fraud

Under the CIS, unless a sub-contractor carrying out construction work is registered for gross payment, payments made to it must be subject to withholding tax.

In order to tackle fraud in relation to the CIS, the government plans to introduce new countermeasures with effect from April 2026. Importantly, these include adverse consequences for businesses who engage the sub-contractor if they knew of should have known that payments made or received were connected with fraudulent evasion of tax.

The consequences of coming within the new rules are severe, with the engaging business potentially becoming liable for the lost tax and penalties of up to 30% of that lost tax. The officers of the business could also be liable for these penalties.

It will therefore be important that the threshold for liability for businesses who "should have known" about (rather than having actual knowledge of) the fraud is not set too low.

Business rates measures, including for retail, hospitality and leisure (RHL) properties

Rates are calculated by multiplying the "rateable value" (RV) of a property by the relevant "multiplier", and then deducting any reliefs.

Permanently lower business rates for RHL properties with an RV of less than £500,000 will be introduced from April (via the introduction of two new RHL multipliers). This will be funded by a new high-value multiplier on properties with an RV of at least £500,000.

More generally, the RV of properties will, from April, will be updated, but the current two multipliers will be reduced.

For more detail, please see our briefing.

As many RHL businesses are currently benefitting from a temporary relief which will end on 31 March, the new permanent rates being introduced from 1 April may actually lead to higher bills.

The likely increase in RVs will not be exactly balanced by the reduction in the multipliers, meaning that there will be winners and losers. The government believes that over half of business ratepayers will see no bill increases and that around 23% should see decreases, leaving around a quarter with an increase. The government has announced various support measures for some of these businesses, including airports and hospitality businesses levied under the high-value multiplier.

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