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.