Summary
The UK government is consulting on bringing overseas sovereign investors in UK real estate within the scope of UK direct tax from April 2024 as part of measures amending the scope of the sovereign immunity tax exemption. This was announced in a consultation document issued on 4 July. This would be a material change and is likely to change how sovereigns invest in UK real estate.
What is the UK proposing in the consultation?
The UK government is proposing to change the way that overseas sovereigns are taxed in relation to activities in the UK. This will impact heads of state, government departments, and sovereign wealth funds amongst others.
Currently they can claim immunity (a tax exemption) that applies to all of their income and gains where it would otherwise become subject to UK tax, whether the profits are generated from investment or trading activity.
The government is proposing to dramatically reduce the scope of the exemption, to just interest income from investment activity. This would bring income profits and capital gains from investment in UK real estate and profits from trading in UK real estate within the charge to UK tax.
Sovereign non-natural persons would be subject to corporation tax, which will increase to 25% from April 2023. Sovereign natural persons (e.g. heads of state) would become subject to UK income tax and capital gains tax at the standard rates. They would become subject to existing reporting regimes.
When will this change?
The government proposes that the tax changes will take effect from 1 April 2024 for non-natural persons within the scope of corporation tax and 6 April 2024 for natural persons.
Capital gains incurred on disposals made on or after 1 April 2024 (for non-natural persons) and 6 April 2024 (for natural persons) would be subject to UK tax. Sovereigns will be able to rebase the cost of their assets at their market value on 1 April 2024 or 6 April 2024 (respectively) so that only capital gains accruing from those dates would be taxable. The government is considering allowing the taxpayer to use the actual acquisition cost where the taxpayer would prefer, e.g. because rebasing at April 2024 may produce a worse position than the actual cost.
Why?
The UK government has compared the UK with other large jurisdictions and decided it is being too generous compared to its international partners, including the US, Germany and Australia. Over time other jurisdictions have reduced the scope of their sovereign immunity.
Also, recent changes levelling the playing field for non-UK residents with UK residents investing in UK real estate make the existing exemption for sovereign wealth funds look more out of line.
What about investment in UK REITs …….
Source: https://www.jdsupra.com/legalnews/sovereign-investors-likely-to-start-8713426/
