UK Capital Gains Tax changes: Bad news for the real estate sector, or not?

Since then, the Treasury has been in consultation with industry on the proposal and that consultation period is shortly to draw to a close. The Treasury argues that the change will raise some £500m in taxes by 2024 and that the introduction of the legislation simply aligns the UK with other advanced countries; a levelling of the playing field if you will. Many argue, however, that the market was already in a state of volatility as a result of Brexit and the time was for easing market pressures, not creating them. 

A positive outlook for the UK

Yet, when we look back at 2017, it proved to be a monumental year for commercial real estate in the UK. Investment into London during 2017 increased by 35% to $33bn compared with 2016, despite Brexit. The weak pound played a key role in this, undoubtedly, with Hong Kong players alone pumping a cool $7.3bn into the London market.

In addition, while the pound remains weak and the spread between bonds and yields remains at 300/350bps, there are few alternatives for capital deployment. CBRE are expecting “robust investment volumes in the property sector in 2018” while Savills predict that “non-domestic investors will be attracted to the UK by comparative risk and […] returns. Prime yields on many commercial property sectors in the UK are now higher than those in much of Europe and Asia-Pacific.”

Offshore jurisdictions: challenge vs opportunity

While many are bullish about the continued flow of capital into UK real estate, there are genuine concerns around the structuring infrastructure available to foreign investors post April 2019. Many feel that UK holding structures, such as real estate investment trusts (REITs) and similar vehicles, are not an appropriate alternative to the well-trodden paths to market of offshore structuring.

REITs will, of course, remain attractive to many fund managers as they will continue to benefit from an exemption to pay UK corporation or capital gains tax on profits (including rental income). While REITS must be structured as a company, there is no requirement for such structures to be established in the UK. REITs must be listed on a recognised stock exchange and The International Stock Exchange (TISE) is a recognised exchange for these purposes. Recent changes to the relevant listing rules of TISE make the listing of UK REITs much simpler. The regulatory regime in the Channel Islands and the Listing Rules of TISE do not prevent the REIT from meeting the conditions set down for REITs in the UK. 

Further, exemptions will likely be made available to certain pension and sovereign wealth funds, meaning these sources of capital will continue to utilise structuring in jurisdictions such as Jersey, Guernsey and the Isle of Man. Moreover, the vast wealth of experience and expertise held in these jurisdictions will always be of importance to foreign investors. These investors will likely wish to outsource the administrative burden of asset holding structures and the Crown Dependencies have lots to offer: flexible company law regimes, robust court systems, pro-active and solution focused regulators, a high degree of skill, and presence of the ‘Big 4’ accountancy practices and top-tier law firms together with excellent administration houses.

Certainly, the proposed changes present challenges; both for the UK and for the jurisdictions currently supporting inward investment in commercial real estate. It is important to remember, however, that with challenge comes opportunity and the offshore world is, as always, ready to adapt with the changing times and meet the needs of its clients.

Paula Thompson is a director for First Names Group and part of our international real estate team. Paula specialises in structuring for the acquisition, development and holding of commercial real estate across a wide variety of property classes.

This article has been issued by First Names Management Limited on behalf of certain companies that form part of the First Names Group. The article has been prepared for general circulation to clients and intermediaries, and does not have regard to the particular circumstances or needs of any specific person who may read it. Nothing in this article constitutes legal, accounting, tax or investment advice.

The information contained in this article has been compiled by First Names Management Limited and/or its affiliates from sources believed to be reliable, but no representation or warranty, express or implied is made to its accuracy, completeness or correctness. All opinions and estimates contained in this report are judgements as of the date of publication, and are provided in good faith but without legal responsibility.