Navigating the calm before the storm on property gains

COMMENT: We are in a period of relative calm before the storm, writes Hogan Lovells partner Elliot Weston. The consultation on changes to the taxation of gains made by non-UK residents on UK property closed on 16 February and we are waiting for publication of the UK government’s response document. The consultation outlined the UK government’s proposals for UK tax to apply to the disposal by non-UK residents of all UK property from April 2019. There will also be a UK tax charge where a non-UK resident realises a gain on disposal of a 25% interest in an entity which derives directly or indirectly 75% or more of its gross asset value from UK property. Generally only gains accruing from April 2019 will be within the charge to tax and historic gains will be excluded. Tax exempt investors that hold their interests in UK property through non-UK resident companies or unit trusts face the prospect of being in a worse tax position than if they had invested directly in the UK property. However, it is understood that HMRC may introduce some form of exemption for entities which are owned by tax exempt investors. For open-ended offshore funds that are tax transparent, they may be outside the scope of the direct non-resident CGT charge. This would not help Jersey unit trusts holding UK property, which are not open-ended and have a mixture of tax exempt and taxable investors. A sensible outcome from the consultation would be that all collective investment schemes holding UK property can be treated as transparent for CGT purposes. This would mean that only the investors (and not the fund itself) would be subject to non-resident CGT (or tax exempt, depending on their status) on their share of any gain arising on disposal of UK property by the fund. Another possibility is that fund managers will look closely at converting existing property funds into tax exempt PAIFs or UK REITs.