Extension of CGT to non-residents holding UK real estate

08 July 2018

The Government published draft legislation (Finance (No.3) Bill) on Friday 6 July 2018 implementing its proposals to extend CGT to gains arising to non-residents holding UK real estate from April 2019.

UK Capital Gains Tax (CGT) has already been extended to certain non-residents holding residential property in recent years; however this new extension will bring almost all non-resident owners of UK land within the scope of UK tax on their gains, and will remove a key tax benefit currently enjoyed by non-UK investors in real estate. The Government has agreed to add a trading exemption to ameliorate the rules for real-estate heavy trades such as retail and hotel chains - although this regime appears more limited than existing exemptions which may still be available. Significantly, the Government has also published a framework for further discussion in relation to the treatment of offshore collective investment vehicles and exempt investors (including Channel Islands unit trusts). This is in response to the concerns highlighted that they were likely to suffer multiple tax charges on the same disposal. 

Key points from the legislation

    • The new regime will take effect from April 2019. The Government was not persuaded by calls to postpone the commencement of the rules in respect of collective investment vehicles citing the uncertainty it would bring to the market and investors. In a nod to simplification, the Government also decided to implement the changes by effectively re-writing the existing legislation. 
    • As expected, historic gains will be protected and investors that have held assets since before April 2019 will only be subject to tax on a disposal to the extent their asset has increased in value since April 2019. Non-resident companies and unit trusts will be taxed at the corporation tax rate (currently 19 per cent) while individuals and other entities will be taxed at capital gains tax rates (currently 20 per cent for higher and additional rate taxpayers). Companies who subsequently become UK resident after April 2019 will retain the ability to calculate their gains or losses using the April 2019 rebasing so as to not dis-incentivise on-shoring.
    • The new rules will apply to certain sales of interests in “property rich” vehicles, as well as to direct sales of UK land assets themselves. A property rich vehicle is one that ultimately derives at least 75 per cent of its gross asset value from UK real estate and has a substantial indirect interest in that land. Guidance will inform what level of due diligence is required to assess the 75 per cent property rich test. Assets matched by an intercompany liability are excluded so that the test cannot be manipulated by related party transactions.
    • Gains on a disposal of an indirect interest will be chargeable where the person making the disposal holds (or has held in the last two years) a substantial indirect interest. This means a 25 per cent or greater interest in the vehicle is necessary and designed to exclude smaller investors who may have insufficient knowledge of the entity they are invested in. The Government has simplified the 25 per cent ownership exemption by only looking back two years, instead of the proposed five years. Sensibly, the Government has removed its proposal to use the “acting together” connected party test and will rely on the existing TCGA interpretation of connected persons (under section 286).
    • The new trading exemption prevents a charge arising where the real estate in an entity being disposed of is all but an “insignificant degree” used in the course of a trade. Insignificant is not defined, but HMRC is known to consider that less than 5 per cent is insignificant in other areas of tax. The substantial shareholdings exemption for trading companies appears to continue to be available and to be more generous where the conditions can be met.
    • In the time available, the Government was not able to finalise the draft legislation for offshore collective investment vehicles and exempt investors. Instead the Government set out a framework to deal with these issues. Offshore funds which are not closely-held and who agree to certain reporting requirements will be eligible for special tax treatment. Offshore funds such as Jersey Property Unit Trusts will be able to elect to be treated as transparent (although HMRC also indicate that they may be able to effectively access an exemption - pushing tax onto investors - as well). In more widely held funds, the intention is to allow an exemption for the fund itself. Investors will then be charged to tax on the gain on their interests in the fund. In exchange the fund must report details of the investors, disposals of interests by the investors and the value of interests, and the Government indicates it is considering the appropriateness of withholding tax on certain disposals. 
    • Even with this extension of CGT investors may still prefer to structure their exit as the sale of the vehicle holding the asset, as this will offer the buyer a Stamp Duty Land Tax saving. It is also worth noting that the recent widening of the Substantial Shareholding Exemption, a relief from UK corporation tax on gains for the disposal of shares in certain companies, may also benefit certain non-UK institutional investors holding UK land through companies. Overseas pension schemes will continue to be exempt from UK CGT on disposals of real estate and interests in property rich vehicles.
    • Certain of the UK’s tax treaties preclude the UK from taxing gains realised by non-residents on sales of interests in vehicles holding UK land, subject in some cases to certain conditions being met. The treaties will “trump” domestic legislation so investors based in these jurisdictions may escape the new regime. The UK Government says it is in discussion with Luxembourg on this issue, one of the key jurisdictions that would preclude taxing gains. However the new regime includes anti-avoidance measures designed to counteract attempts to restructure property holdings in a way that takes advantage of favourable tax treaties from 22 November 2017 (the date the measure was first announced).
    • Non-UK entities that are currently outside the scope of UK CGT on residential property gains, by virtue of being widely held (for example certain funds), will be subject to tax on all gains realised on their UK property assets under the new regime. The Government has harmonised the new rules with the existing regimes for non-resident CGT and abolished ATED-related CGT on disposals by non-residents of residential properties. The existing regime for developers and traders (including the Transactions in UK Land rules introduced in 2016) is not affected.


This is a measure which has to some extent been expected by observers of the UK market for some time and certainly since the changes to taxation of residential property held by non-residents. The UK has been almost unique among jurisdictions in the developed world for not applying tax to non-residents on gains made on their UK real estate assets. This is the case throughout the rest of western Europe and the United States, for example. Therefore the UK move, while clearly unwelcome for investors, represents an alignment of the UK position with most other jurisdictions in which those investors might invest. That said, it will also remove one of the most attractive features of UK real estate for non-UK investors, and with around 28 per cent of the UK’s investment grade commercial property held by non-residents this will inevitably have an impact on the market. It is welcome that the Government has listened to the industry and in particular seems to have adopted a constructive approach to offshore fund vehicles where many had been concerned that the stigma of being offshore might have led to a harsher treatment. Given the trading exemption and the special treatment for collective investment vehicles and exempt investors, the Government has been in listening mode to minimise the impact on the UK real estate market.