Following earlier announcement and consultation, on 6 July 2018 the UK Government published draft legislation which will create a new charge to UK capital gains tax / corporation tax on the disposal by non-residents of UK real estate.

It is proposed that the legislation will be effective in relation to disposals occurring on or after 6 April 2019.

The current position: residential or commercial; trading or investment?

At present, non-resident investors in UK real estate enjoy a privileged position. Gains accruing to non-residents on the disposal of UK commercial property held as an investment are not currently taxed in the UK. Disposals of UK residential property held as an investment are taxed, but many are able to take advantage of an exemption for widely-held investment vehicles (such as funds).

By introducing this new legislation, the Government is asserting its right to tax gains attributable to most disposals of UK real estate held by non-residents, including direct and certain indirect disposals, in common with many other jurisdictions.

Dealing in UK real estate in the course of a trade is already within the charge to UK income and corporation tax, and will remain so under the new regime.

New legislation: direct disposals (asset sales)

The new rules will mean that gains made on most direct disposals of UK real estate – whether residential, commercial or mixed use - by non-residents will be brought within the charge to UK tax. The existing exemption for a narrow group of non-resident investors such as pension funds will continue to be available.

New legislation: indirect disposals (e.g. share sales)

The new rules will also bring indirect disposals of UK real estate (such as disposals of an interest in a property-owning company) within the charge to UK tax. The charge will only apply if both:

  • the relevant interest derives its value as to at least 75 per cent from UK real estate (meaning the entity in question is “property rich” under the rules); and
  • the non-resident seller holds (or has held within the previous two years) an interest in the property owning entity of not less than 25 per cent (“25 per cent ownership test”). Interests of the seller and persons connected to him are aggregated in determining whether the 25 per cent ownership test is met. Insignificant periods of ownership are disregarded though, which should prevent persons such as anchor investors in a fund inadvertently falling within charge.


Only gains accruing after April 2019 will be brought within the charge, and so pre-April 2019 gains should not be taxed. In the case of direct disposals only, sellers may elect for the original purchase price of the property (rather than its value in April 2019) to be its base cost for capital gains computation purposes.

Exemption for indirect disposals of property used in the course of a trade

The Government has heeded representations made during the consultation and has created an exemption from the charge to tax for indirect disposals if the relevant UK real estate was, in the 12 months prior to disposal, held in the course of a trade. This move will be welcomed by property-rich trading groups such as hotel and retail businesses.

Collective investments

The Government has decided to consult further on the application of the rules to collective investment structures (such as property funds) and joint venture arrangements, and so there remains some uncertainty as to how the rules will apply in this context. HMRC has, however, published guiding principles which indicate that, for example, offshore funds opting to adhere to UK reporting requirements will be able to access favourable tax treatment.

Treaty matters

Some double taxation treaties – notably that with Luxembourg – operate to prevent the UK from taxing gains made on the indirect disposal of UK real estate. Because of this, anti-avoidance measures have already been put in place which would defeat new structures taking advantage of this planning. The Government has now announced that it is also renegotiating the UK-Luxembourg treaty so as to give the UK greater taxing rights in future.


Tracy Fisher

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