Now is the time to consider submitting commercial property structures to a health check.


Historically, non-UK resident investors purchasing UK commercial property as an investment have benefited from a fairly benign UK tax regime.

Firstly, there was generally no UK tax charge on any profits arising from disposal due to an increase in value of the property over the period for which it was held (capital gains tax ‘CGT’), and secondly, through the use of leverage (both from third party and/or shareholders and other connected lenders) it was possible to achieve a relatively low net rate for UK tax on any rental income received.

However, both of these points are changing, and investors will need to consider the commercial implications of these changes to ensure they fully understand the impact of the proposals on their investment structures and whether any alterations to the underlying corporate structures are subsequently required.

So what are the key changes?

  • The current exemption from capital gains tax for non-resident investors will be abolished from April 2019
  • April 2020 sees the introduction of the corporate interest restriction which will be capped at the highest of: £2 million per ‘group’ (using the IFRS definition of a group), 30% of the structure’s EBITDA, or actual third party interest costs
  • Also from April 2020, non-resident corporate vehicles holding UK property will be subject to UK corporation tax on their rental income profits, rather than UK income tax as at present

Capital Gains Tax

It is the CGT change that has grabbed the headlines and, whilst some investor groups have taken a view that this tax is something of a ‘levelling of the playing field’ because of similar taxes in other countries, others have focussed on the various (but limited) opportunities to reduce the CGT charge which include:

  • A rebasing to the market value of the property at April 2019 for the purposes of calculating the gain, with an option to use historic cost if preferred. This is of particular relevance where a property was purchased a number of years ago and ensures any historic gain is not taxed
  • Exemptions for ‘collective investment schemes’ from the CGT charge, although the investors become liable on the disposal of their shares or units in the vehicle
  • A ‘transparency election’ for entities such as unit trusts (or JPUTs) such that any disposal of UK real estate is treated as a direct disposal by the individual investors, rather than the entity itself
  • An exemption for investors holding less than 25% of a property owing company
  • Exemptions for certain classes of investors such as sovereign immune bodies and pension schemes, subject to the nature of the vehicle owning the real estate

There are too many variables in the mix of structures, investors, and asset classification to define a simple ‘one stop fits all’ solution, and the implications of changing a structure from a cost/benefit perspective need to be considered before any such changes are implemented. It therefore follows that getting the right advice on a timely basis is even more critical than before, particularly where there is a diverse mix of investors and promotors of structures are looking to give maximum flexibility and take advantage of relevant exemptions and other opportunities to minimise any tax liabilities.

Corporate interest restriction

Historically it has been possible to achieve a relatively low net percentage rate for UK tax charged on rental income received after allowance for interest deductions from third party and shareholder loans. The new corporate interest restriction will introduce a cap on the deductible amount, but a critical aspect is that the cap is restricted by any ‘group’ of related entities. The definition of a ‘group’ is in accordance with IFRS 10 “Consolidated Financial Statements” that focusses on the concept of control, rather than the former measure of percentage shareholding.  Previously, it was relatively simple to structure a series of seemingly related entities such that they failed the consolidation test, however IFRS 10 changes this. Now, where a single investor has a significant ‘controlling’ interest over a number of structures these could be grouped and the deduction under the corporate interest restriction applied across the various structures. This could therefore effectively increase the tax payable across the ‘group’.

Change to basis of assessment

The change from being assessed under income tax to an assessment under corporation tax will require quarterly returns and may impact cash flow. It has been proposed by HMRC that certain restrictions on the use of ‘brought forward’ losses will apply, but on the positive side a 2% annual depreciation allowance will be introduced for most types of commercial buildings.

In summary, whilst there are many similarities to most UK commercial real estate investment holding structures; it is the minor differences that are critical. These differences may be strategic, (e.g. a decision on whether to reinvest sale proceeds or return equity to investors) or in the nature of the financing mix, but the key differentiator will be the investors themselves who may be either exempt institutions, or major stakeholders in a number of structures, or possibly only have a minor holding. It is for this reason that now is the time to consider submitting commercial property structures to a health check. Regardless of that decision, if you choose to do nothing else at this time, obtaining a market valuation at 1 April is seen as critical in ensuring an appropriate base point for future CGT calculations.



21 March 2022

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