Sovereign immunity: the Government revisits proposals to reform the UK taxation of sovereign investors

Introduction

Four years after the then Government first consulted on potential reforms to sovereign immunity (see our article “Waning immunity? Government consults on reforming sovereign immunity from tax”), in the Autumn Budget 2026, the Government has announced a series of changes to the UK taxation of sovereign investors. 

The most significant impact of the changes is that the existing UK tax exemption on real estate income and gains for sovereign-immune investors will be removed with effect from 1 January 2029. From that date, these investors will generally be subject to UK corporation tax on real estate income and gains at the current rate of 25% (subject to their ability to structure into the UK private real estate investment trust (REIT) regime and access the effective 15% rate envisaged by the consultation, discussed below).

State-operated pension funds (SOPFs) will continue to benefit from an exemption from chargeable gains.

What will the new rules say?

Any investor (including those who may have already agreed their sovereign status with HMRC) wishing to qualify for the new status will be required to make a formal application to HMRC. 

The benefit of doing so will be that other exemptions (e.g. from withholding tax on UK-source interest, the qualifying institutional investor (QII) substantial shareholding exemption (SSE) insofar as it does not relate to UK real estate) will (continue to be) available to those investors.

A state-owned entity will only qualify for sovereign tax status if it is wholly owned by a sovereign state and it is incorporated and resident in that sovereign state. This is a restriction that may catch existing holding structures in third countries, and on which the consultation invites comment. 

Will all sovereign investors be taxed on real estate profits?

No. SOPFs will continue to benefit from (i) an exemption from chargeable gains and (ii) the QII SSE on disposals of property-rich vehicles. 

What other changes will there be to existing regimes?

Many (taxable) overseas investors in real estate are currently eligible for partial relief from withholding tax on distributions from UK REITs, by virtue of their residence in a jurisdiction that has a relevant double tax treaty with the UK. 

To ensure sovereign investors are not treated differently by virtue of the jurisdiction in which they are based, the consultation envisages a new sovereign REIT holding company for sovereign investors.

Provided it is wholly owned by a person with sovereign tax status (and certain other conditions are met), the rate of tax applicable to property income distributions from UK REITs to such a holding company will be 15% rather than 25%, bringing the treatment of sovereign investors into line with the majority of overseas investors in UK real estate which are resident in treaty jurisdictions.

Who else will this impact?

The rates of tax paid by many real estate funds and their structures are derived to a certain extent from their investors and the extent to which they are treated as qualifying institutions for the various holding company regimes. 

This change will therefore have an impact on transaction modelling, even where the investments in question are not held directly or through transparent structures by sovereign investors. 

Next steps

The consultation closes on 20 January 2027 and will be followed by a technical consultation on draft legislation. The reforms are expected to take effect from 1 January 2029. Assets brought into the charge to tax on chargeable gains as a result of the reforms will be rebased to their market value as at 1 January 2029.

Transitional reliefs are expected to be available to enable restructuring; this is expected to include a relatively broad stamp duty land tax exemption.  

Impacted sovereign investors and private capital managers should begin mapping their investment holdings that could be impacted by these reforms, including any UK real estate holdings and UK investment structures that rely on the “qualifying investor” status of sovereign or Crown-immune investors, modelling alternative structures, and considering whether to respond to the consultation, particularly on the proposed reforms to the REIT rules and the transitional reliefs.