Deloitte: Real estate tax changes

Written by: Deloitte Posted: 10/01/2020

Deloitte_AdamHartAdam Hart, Senior Tax Manager at Deloitte Guernsey, looks at the new capital gains tax rules applying from April 2019, which may have an impact on foreign investors in UK commercial real estate, and what funds should be considering now in order to navigate this new tax landscape

The UK has, until recently, offered a highly attractive fiscal environment for foreign investment into UK commercial property. The benefits included:
• Often low levels of UK tax on investment income through a range of deductions (for example, shareholder debt) and the availability of capital allowances and reliefs
• No UK tax on capital gains
• No UK stamp duties on disposal of foreign shares/units.

This made the UK particularly attractive for foreign investors when compared with many other jurisdictions in which tax foreign investors hold property.

Subject to a 5 April 2019 market value rebasing, foreign investors will now be taxed on realised UK commercial property gains, putting them largely on a par with UK investors.

Funds will be within scope of UK capital gains tax, whether selling a property directly or selling an interest (of any amount) in a property-rich vehicle (75% or more of the value is derived from UK land of any type).  

However, new regimes are available which in effect pass the point of taxation from the fund to its investors. This could be attractive to certain types of ‘tax benefited’ investors, such as those who are tax exempt, and this is the principle reason (following industry consultation with HMRC) why these regimes exist. A large amount of UK commercial real estate is held by pension funds, for example.

There are two regimes that may be elected into, depending on the circumstances. The first is the Transparency Regime – which may apply to income transparent funds (typically GPUTs and JPUTs). The effect of the Transparency Regime is to treat the fund as though it had always been transparent for capital gains tax purposes. Thus, any disposals by the fund (of UK land or UK land-rich vehicles) will be treated as being disposed of proportionately by each investor. 
 
Deloitte_illoIt is important to note that the Transparency Regime for existing income-transparent funds needs to be (irrevocably) elected into by 5 April 2020. Furthermore, the consent of all investors in the fund is needed to make this election, and so time is already running out to put this into effect. 

The second is the Exemption Regime, which may apply to non-transparent funds (such as companies). It allows an election to be made for the relevant fund or vehicle to be exempt from UK capital gains tax. The election also exempts any non-UK special purpose vehicles held below the fund.  

The Exemption Regime requires the fund to be widely marketed, or to be non-close (controlled by five or fewer unconnected persons) and have less than 25% of its investors being eligible for capital gains tax treaty relief. 

HMRC will require detailed information about each investor upon application for the regime, which may prove problematic for many existing funds. The election can be backdated for up to 12 months, so 5 April 2020 is also likely to be a key date for many existing funds wishing to enter the Exemption Regime.

Impact on investors

Whether either of these regimes is beneficial will depend on a number of factors; in particular, the investor base. It is perhaps unlikely that tax-benefited investors would want to invest in a fund that is not in one of these regimes.

Conversely, the regimes may not be attractive to other investor types. Ultimately, both regimes currently require the investor to make a tax filing and pay the tax. This could be a burden on investors and could lead to dry tax charges if not carefully managed.  

There is the possibility that HMRC will allow the fund to report and pay tax on behalf of the investors. This would be a welcome development, especially for the Transparency Regime, given the need for full investor consent. 

Both regimes are complex, involving a number of ongoing requirements, and they are likely to increase the cost of running the fund and the risk of inadvertent non-compliance.

We have seen an increasing trend in the adoption of the UK REIT regime by closed-ended funds as a result of the ongoing changes to the taxation of UK real estate. Despite this, an offshore fund investing in UK property is still an attractive proposition for other tax reasons – for example, stamp duty or inheritance tax.

And there are still many non-tax benefits to using an offshore vehicle, such as the legal and regulatory environment. 

FIND OUT MORE

Deloitte LLP provides audit, tax, consulting and financial advisory services, bringing world-class capabilities and high-quality services to clients. The company has the broadest and deepest range of skills of any global business advisory organisation and is a world leader in the professional services industry. We advise and deliver for the public sector as well as global and local businesses across every industry. 
 
Deloitte employs over 200 professionals in Jersey and Guernsey and is part of Deloitte North South Europe (NSE). The NSE firm brings together 13 countries and over 40,000 talented people, giving the firm the expertise to solve organisations’ most complex challenges and make an impact that matters. 

W: www.deloitte.co.uk
T: Deloitte Jersey: +44 1534 824200
T: Deloitte Guernsey: + 44 1481 724011

• This advertising feature was first published in the November 2019-January 2020 edition of Businesslife magazine


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