Legal briefing | |

Tax developments for non-resident investors in UK property


2020 is going to be an important year for many non-UK resident investors in UK real estate:

  • Real estate fund managers are continuing to get to grips with the non-resident property gains rules. In particular, an important 5 April deadline is looming for those making elections. 

  • Non-resident corporate landlords will have to face up to the challenges posed by moving from income tax to the corporation tax regime from 6 April, with potential structural changes or elections likely to be on the agenda for many affected.

  • A new Budget is scheduled for 11 March, with the new Government expected to implement some of the changes it announced during the election campaign, including real estate tax measures.
Non-resident property gains (NRPG)


With effect from 6 April 2019, any person who is tax resident outside the UK and holds either:

(i) a direct interest in UK land, or

(ii) a substantial (generally, 25%+) indirect interest in UK land via an entity which derives at least 75% of its value from UK land (a UK property rich entity),

is within the scope of UK tax on any capital gains realised on a disposal of that interest (subject to re-basing at April 2019 values and available reliefs). Previously, non-UK investors were taxed on such gains only in limited circumstances.

Importantly, the rules continue to allow exemption for those non-residents exempt from UK tax on gains other than by way of residence such as certain pension funds, charities and sovereigns.

While offshore "collective investment vehicles" (or CIVs) (other than partnerships) are within the scope of the rules, helpfully, special rules have been introduced to prevent charges arising for many funds:

  • for widely-held and non-close CIVs and UK property-rich companies wholly-owned by partnerships or authorised contractual schemes, an exemption election is available, subject to meeting various conditions and reporting information to HMRC; and

  • for income transparent vehicles (e.g., Jersey Property Unit Trusts (JPUTs) or Luxembourg Fonds Commun de Placement (FCPs)), alternatively, a transparency election is available, the effect of which is to treat the CIV as a partnership for all UK capital gains purposes.

However, the quid pro quo for these elections is that investors in UK property-rich CIVs (whether UK or offshore) will not benefit from the 25% de minimis threshold for the charge to apply to them. So all disposals of interests in such funds will potentially be caught by the rules, subject to available reliefs.

The rules are complex and the optimal application will depend on the particular structure and its investors.


The exemption election and transparency election for CIVs mean that many fund structures, including the ever-popular JPUT, remain viable for UK property investment.

Fund managers will, however, need to determine which election (if any) is possible/appropriate, and, where not already actioned, to make sure that they take the necessary steps to make the election or to restructure within the relevant timeframe:

  • for those income-transparent funds existing at April 2019 wishing to make the transparency election (which is irrevocable), there is a hard deadline of 5 April 2020. Given that investor consent is required, fund managers who have not yet engaged with investors should consider whether they should do so as soon as possible. For those with taxable investors or potentially taxable investors, more care will be required in ascertaining whether this is the appropriate route;

  • as regards the exemption election, managers are able to specify a date in the election from when they wish it to come into force. However, if that date is more than 12 months earlier, HMRC consent is required. So, while there is no hard deadline for making the exemption election, managers may wish to make the election by 5 April 2020 if they need it to apply to any disposals or relevant transactions which may trigger gains and which have been made since the rules came into force.  

Helpfully, the exemptions not only apply to wholly-owned fund subsidiary vehicles but in certain cases proportionately apply to certain other 40%+ subsidiaries.  However, in the case of these and other joint ventures, funds and other exempt investors will want to ensure that the structuring is such that the relevant tax charges will actually be borne at the right level in the structure or, effectively, by the right participants, so that they actually get the full benefit of the exemption.  This may require existing arrangements to be revisited.

Investors and fund managers are also asking us about a number of other issues arising from the NRPG rules:

  • whether investor-level UK tax exemptions from the new charge apply.  Key are the statutory exemption for investors falling within the UK definition of "overseas pension scheme" and the rules for sovereigns and charities.  Helpfully, the new provisions contain further exemptions to assist typical structures, but the factual position will be key. As with funds, investors might also wish to examine their holding/JV structures to ensure that their returns are not hit by unexpected tax charges under the NRPG rules lower down the holding structure;

  • the implications of changes in investor base in property funds for funds potentially seeking to make a transparency election. Importantly, an election by an existing fund will impact on new investors automatically, without consent being required;

  • the availability of relief under double tax treaties and whether this will take investors outside the charge. There is particular interest in relation to Luxembourg residents selling interests in UK property rich holding vehicles. Care should be taken on the facts as anti-avoidance rules are in place to curb planning around treaty exemptions, and it is understood that there are already ongoing discussions between the UK and Luxembourg governments as regards amending relevant provisions of the treaty;

  • historic distribution methods/policies which could potentially reduce the scope for double tax charges, but which could impact ongoing compliance and, indeed, the availability of the exemption election in the first place;

  • whether a global fund is UK property-rich in the first instance. This will be a question of fact.

There are also issues for corporate transactions and structuring, for example:

  • latent gains in UK property rich entities may now need to be taken into account in pricing with any elections (or lack of them) being relevant. Appropriate due diligence should be undertaken;

  • investors and funds are now also considering the consequences of "onshoring" (i.e. relocating offshore property holding vehicles to the UK or using UK structures as appropriate).  This is becoming increasingly an issue for consideration as a result of the proposed changes for non-resident corporate landlords and other OECD BEPS driven measures and implications;

  • the potential elephant in the room is that the NRPG rules may well have given HMRC the machinery to levy SDLT on transfers of interests in UK property-rich vehicles. While there is no visibility on whether/when this could happen, investors should be aware of the impact of the now heightened risk of SDLT on pricing.
Extension of corporation tax to non-resident corporates landlords (NRCLs)


NRCLs are currently liable to income tax - not corporation tax - on net rental profits. From 6 April 2020, rental profits of NRCLs will instead become liable to corporation tax (CT), with different rates, computational rules, payment and filing requirements. Some headline consequences:

  • corporation tax will be levied at 19% (assuming that, as announced in the election campaign, the rate will not be reduced to 17%) – currently, NRCLs pay basic rate income tax at 20%;

  • expenses of management should be deductible for NRCLs (unlike under income tax);

  • surrenders of losses between group members will become possible under the CT group relief rules;

  • financing will come within the loan relationship rules, where net debits and credits are calculated separately before being set off against rental profits.  This may be more flexible, but the potential downsides include:

    - potential restriction on deductions for interest and other finance costs (corporate interest restriction (CIR)) in excess of £2m per group to (broadly) 30% of EBITDA, subject to making an election which may allow full deductions for third party debt;

    - restrictions on deductions of interest and other relevant costs under the UK's anti-hybrid rules; and

    - restrictions on use of brought forward income losses and capital losses over £5m per group to 50% of profits in any one year – though pre-6 April 2020 property rental losses will still be able to be carried forward for use against future profits without restriction.

  • Existing income tax withholding provisions under the non-resident landlord scheme will continue to apply to NRCLs (notwithstanding that they will be in the CT regime), unless the NRCL has permission to be paid gross.


The traditional offshore corporate holding structure, where, effectively, tax on income is reduced by tax deductible, transfer-priced finance costs (such as interest on shareholder loans), will no longer operate tax efficiently to the same extent for higher-value property-holding groups or entities. 

This will potentially increase tax costs and consequentially reduce returns, so in this more challenging environment, consideration should be given (in particular in income-driven models) to optimising use of available allowances, such as capital allowances for expenditure on plant and machinery (at 6% or 18%, depending on the items concerned) and the relatively new structures and buildings allowance (currently at 2% p.a. of qualifying expenditure).

Those NRCLs with external debt might consider making an election to use the "group ratio" method, which can prevent or reduce CIR restrictions on third-party debt. However, care is needed to ensure that the debt is not inadvertently recharacterized as "related party debt" through linked shareholdings, guarantees or other arrangements.

Where there are hybrid entities, instruments or other arrangements, potentially all relevant financing costs could be disallowed. Arrangements where this could be an issue (e.g., where there are "check the box" entities for US tax purposes in a structure) may need to be restructured.

We are likely to see more use of parallel, rather than group, structures to maximise use of the £2m and £5m de minimis amounts in the CIR and carried forward loss restriction rules respectively, although care should be taken with anti-avoidance provisions.  While private equity real estate generally uses parallel structures anyhow, such that CIR may have less impact, the hybrid rules could still be relevant depending on the profit extraction methods and identities of the investors.

As regards compliance matters, NRCLs already carrying on a property rental business at 6 April 2020 will be automatically registered for CT and allocated a CT unique taxpayer reference number (UTR).  Payment deadlines, tax return formats and filing requirements will all change, in many cases materially. Detailed HMRC guidance on these practical issues will be published in due course. NRCLs should contact their UK tax compliance providers for advice on steps they should be taking if they have not already done so.

In addition, HMRC are already tightening up on compliance measures by issuing notices to tenants reminding them of their obligation to deduct 20% tax at source.  Landlords should therefore check that they have valid NRLS gross payment certificates if they wish to avoid adverse cash flow implications.


The Chancellor, Sajid Javid, has announced that the next Budget will be held on 11 March 2020.

One of the key property-related measures from the Conservative Manifesto and related materials that we may see implemented is an additional 3% surcharge on non-UK residents buying UK residential property. The government had earlier consulted on a 1% surcharge, but no date was set. If the 3% rate is introduced using a similar mechanism, it would be on top of the existing 3% surcharge for purchases of additional dwellings and purchases by companies across the rate bands, so the top rate for residential property would be 18%. Helpfully, however, for those acquiring multiple properties, such as a fund, existing relief such as the commercial property rate for six or more properties and multiple dwellings relief should continue to be available. Commercial and mixed property transactions should be unaffected.

Another potential change, originally announced by Boris Johnson at the CBI conference in November, would be to increase the rate of the new structures and buildings allowances for commercial property from 2% to 3%. As noted above, where applicable, these allowances may benefit NCRLs looking to offset increased tax costs as a result of coming within the corporation tax regime, although the allowances are ultimately only a cash flow benefit if the property is later sold, as the allowances claimed are added to the disposal consideration.

Finally, as noted above, we are expecting the Budget to propose the repeal of the scheduled reduction of the corporation tax rate from 19% to 17%.

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