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Taxing UK property gains of non-UK residents

09 November 2018

Draft legislation has now been published to bring most gains realised by non-UK residents arising from disposals of both direct and indirect interests in UK property within the UK tax net. We outline the key changes from the original proposals below together with the steps that we consider taxpayers should now be taking in light of these provisions.


Direct disposals

Direct disposals of interests in UK land which are not already chargeable to UK tax under mainstream provisions (most interests in residential property have been subject to capital gains tax since 2015 other than interests held by widely held investors) will become taxable from 6 April 2019. The gain will either be chargeable to capital gains tax (for non-UK resident individuals) or corporation tax (for non-UK resident corporate entities). The taxable gain will be limited to the increase in value arising from April 2019 determined either by:

  • Reference to the market value in April 2019 or
  • Time apportionment of the total gain since acquisition.

The main area that has been clarified by the draft legislation is that the historic tax rate surcharge on residential property gains of companies chargeable to the Annual Tax on Enveloped Dwellings (ATED related gains) will be abolished for disposals from 6 April 2019.


Indirect disposals

Gains on disposals of ‘closely held’ indirect interests in ‘property rich’ entities (those that derive at least 75% of their value from UK land) will also be taxable from 6 April 2019. However, the draft legislation includes a specific exemption for gains arising on the disposal of interests in companies that are trading companies both before and after the disposal. This should ensure that investments in property rich trading vehicles such as hotels, care homes, retailers are not disadvantaged by the new rules.

Only the gain arising from 6 April 2019 will be taxable. Originally, it was proposed that this could only be calculated by reference to the actual market value on 6 April 2019. However, the current draft legislation will allow taxpayers to elect for the gain to be calculated by a time apportionment of the actual gain - provided that this does not result in a loss being attributed to the post 6 April 2019 period.

For an interest to be considered ‘closely held’, it needs to be a holding of 25% or more (either held alone or taking into account the holdings of connected parties). In the original proposals, this was to be considered taking into account holdings both at the time of disposal and in the five years prior to disposal, so that phased withdrawals from an investment would be caught. This ‘look back’ period has, however, been limited to two years. The 25% threshold is disregarded for disposals of investments in collective investment vehicles - a separate regime will apply to these (as detailed below).

The original proposals also included a requirement for UK professional advisers to report indirect disposals to HMRC. In light of the consultation, this requirement has been dropped.


Collective Investment Vehicles (including UK REITs)

This is a separate regime, which will operate for ‘property rich’ collective investment vehicles. For this purpose, collective investment vehicles will include:

  • UK REITs
  • Foreign equivalents of UK REITs
  • Collective Investment Schemes (as defined under FSMA 2000)
  • Alternative Investment Funds (as defined in regulation 3 SI 2013/1773).

The default position is that indirect disposals by non-UK residents in collective investment vehicles will be chargeable to UK tax irrespective of the size of the investor’s holding in the vehicle. Collective investment vehicles that are not either companies or partnerships will be deemed to be companies for the purpose of considering whether an indirect disposal has occurred. Indirect disposals by UK REITs will, however, be treated as if they were direct disposals of the property and, therefore, as exempt disposals under the REIT regime.

The default position can be superseded by two elections:


Transparency election

Collective investment vehicles that are already treated as transparent for tax purposes in respect of income (but not gains) will be able to elect (irrevocably) to be treated as a partnership for tax purposes. This will mean that both income and gains become transparent so that disposals of interests in the vehicle are treated as disposals of interests in the underlying property. The consent of all investors is required in order to make the election and strict time limits will apply.

Exemption election

The exemption election will only be available for non-UK resident collective investment schemes, ie the foreign equivalents of UK REITs and some partnerships. An extensive set of qualifying criteria needs to be met in order to be able to make the election. In particular, these include a requirement for diverse ownership of the collective investment vehicle.

The effect of an exemption election will be that the collective investment vehicle itself (except in the case of partnerships) and any entities in which it has an interest of at least 40%, will not suffer tax on either direct or indirect disposals on the proportion of any gains attributable to the holding of the collective investment vehicle in the asset. However, this comes at a cost: the vehicle will have to comply with extensive reporting requirements for the exempt transactions, its investors and dealings by the investors in their investments in the vehicle.

A variety of events can cause the election to cease to have effect, including revocation of the election - either by the collective investment vehicle or by HMRC. In these circumstances, there will be a deemed disposal and reacquisition by the investors of their investments in the vehicle.


Reporting of disposals

The draft legislation requires that from 6 April 2019, disposals must be reported within 30 days of completion and for a payment on account of the tax due to be made of the same date (in most cases). This 30 day time limit also applies to chargeable disposals by investors in collective investment vehicles, including those arising on a deemed disposal and reacquisition by the investors of their investments in the vehicle. Fund managers will, therefore, be under an obligation to notify investors when such events occur.


Exempt investors

Tax exempt investors, such as pension funds and sovereign wealth funds will be able to claim exemption from tax on any gains attributed to them, for example by virtue of being members of a partnership holding UK property or which arise on the sale of shares in a ‘property rich’ company.

In some circumstances, disposals by entities that are wholly controlled by exempt investors will also be treated as exempt where the disposal is of an investment in a collective investment vehicle that has made the exemption election. This could be relevant to, for example, disposals by a company wholly owned by a pension scheme.



The new provisions are complex and will have a significant impact on non-UK residents invested in UK real estate. While the original consultation in November 2017 came as a surprise to many, HMRC are to be applauded for actively engaging with interested parties and seeking to deal with the technical and practical concerns raised.

As the full suite of legislation has now been published (and significant changes to this are not expected), property investors should now take time to consider the implications for their investments at an operational and a strategic level. 

Read more on the Finance Bill 2018-19