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UK Real Estate Update

With effect from 6 April 2019, non-UK residents will become subject to tax on chargeable gains arising from the disposal of all UK land, including commercial and residential real estate (the NRCGT Regime). Given the complexity of the legislation and the fact that the NRCGT Regime introduces a significant change to the scope of the taxation of UK real estate, it is important to examine current investment and holding structures so as to understand the impact of the NRCGT Regime and the consequences of any restructuring.

Prior to the introduction of the NRCGT Regime, non-UK residents have generally been outside the scope of UK taxation in respect of income and gains derived from UK real estate. However, in recent years, legislation targeted at specific holders of UK real estate has been introduced to remove some of the distinctions between the taxation of residents and non-residents and distinctions between the taxation of residential and commercial real estate.

The NRCGT Regime will go a long way to achieving the government’s stated intention of levelling the playing field between domestic and overseas investors in UK real estate, as well as between gains in respect of both commercial and residential property, with the resulting tax considerations becoming a new reality for many non-UK investors.

NRCGT Regime

The NRCGT Regime taxes both direct and indirect disposals by non-UK residents of UK real estate, whether residential or commercial. Under the NRCGT Regime, non-UK residents will be subject to tax on all gains realised on their UK real estate assets, subject to various exemptions and reliefs. Set out below is a high level overview of some of the key features of the NRCGT Regime.

What are “Indirect Disposals” under the NRCGT Regime?

Indirect disposals are the sale of interests in “property rich” vehicles by a person who has a substantial indirect interest in the UK land. A vehicle is “property rich” for these purposes if it derives at least 75% of its value from UK real estate. Broadly, a person will have a “substantial indirect interest” where they have held a 25% investment in that property rich vehicle, subject to minimum holding periods and aggregation of interests held by related parties.

Exemptions and Reliefs

Broadly, investors that are exempt from chargeable gains (such as overseas pension schemes and sovereign wealth funds) should continue to be exempt under the NRCGT Regime.

The NRCGT Regime includes a “trading” exemption from NRCGT Regime taxes which applies to indirect disposals of interests in companies with real-estate heavy trades. This exemption applies if it would be reasonable to conclude that (so far as the market value of the company’s assets derives, directly or indirectly from UK real estate) all of the interests in UK land are used for a trading activity, or all of the interest in the UK land would be used for that trading activity if any UK land assets used for non-trading (investment) purposes are no greater than 10% of the market value of the UK land held by the company for trading purposes.

The current “substantial shareholdings exemption” (SSE) for trading companies also continues to be available in the context of indirect disposals. The SSE exemption may be preferred to the “trading” exemption on the basis that the non-trading activities test in the SSE uses a 20% threshold to determine whether or not the trading requirement is met. However, the “trading” exemption from NRCGT Regime taxes should prove to be available to a wider class of investors than the SSE, including non-corporate shareholders such as individuals and unit trusts.

Further, where a property rich company is owned by an appropriate proportion (80%) of “qualifying institutional investors” (including pension funds, charities and sovereign wealth funds) for SSE purposes the trading requirement is dropped altogether.

Double Tax Treaties

The UK-Luxembourg double tax treaty currently prevents the UK from taxing gains on disposals by Luxembourg residents of interests in UK “property rich” vehicles. However, the UK is in the process of renegotiating with the Luxembourg government the real estate related provisions in the Luxembourg treaty, so the protection may not be available in the future. Mindful of the period of time before the Luxembourg treaty can be renegotiated, the UK government has ensured that the NRCGT Regime also contains anti-forestalling provisions to prevent new structures being established in Luxembourg in order to take advantage of this protection.


The NRCGT Regime provides for the rebasing of assets held on 5 April 2019 that have not come into charge before April 2019. Alternatively, an election can be made for calculating a chargeable gain in accordance with the usual rules, where this produces a beneficial result, although there are limitations around this producing a loss.

Collective Investment Vehicles (CIVs)

The NRCGT Regime provides CIVs with the option to make certain elections so as to reduce the potential for double taxation of the fund and investors. Owing to the importance of “tax neutrality” for investors (such as pension funds and other exempt institutional investors) in these structures, this is an important feature of the NRCGT Regime and a welcome concession from the UK Government.

The 25% ownership requirement for the purposes of the application of the NRCGT Regime to indirect disposals will not apply to investors in CIVs (whether that CIV is a partnership or not), investors in companies that derive more than 50% of their value from one or more CIVs, or disposals by CIVs themselves or by companies in their ownership.  However, the 25% ownership requirement will apply to investors in CIVs that were marketed on the basis that no more than 40% of the CIV’s market value will be derived from interests in UK land or UK property-rich companies.

A CIV can elect to be regarded as either “transparent” or “exempt”, subject to satisfying the relevant requirements.

By making a transparency election, the CIV will be treated as a partnership for the purposes of chargeable gains calculations. In particular, the CIV will not itself be subject to NRCGT Regime tax, but UK and non-UK resident investors will be subject to tax on any gains realised on a disposal of the underlying assets.

The effect of making an exemption election is that while the CIV (and any other elected entities) remain persons notionally chargeable to tax on gains, the CIV will be exempt from tax on direct and indirect disposals of UK land. UK resident and non-UK resident investors will instead be subject to tax on any gains realised on a disposal of their interest in the CIV. Unlike the transparency election, the exemption election can be revoked.

Non-UK investors should be aware that they may have UK tax filing obligations as a result of such elections being made.  The practical impact of this position may be softened in the future, as HMRC is considering new rules that would allow funds to file returns and pay tax on behalf of their investors.

Key Contacts

Adam Blakemore
T. +44 (0) 20 7170 8697

Linda Z. Swartz
T. +1 212 504 6062

Jon Brose
T. +1 212 504 6376

Andrew Carlon
T. +1 212 504 6378

Mark P. Howe
T. +1 202 862 2236

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