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This briefing note sets out some of the upcoming legislative changes to the taxation on gains realised by investors making disposals of UK commercial properties. It also considers the advantages and disadvantages that fund structures offer for UK real estate investments.


From 6 April 2019 both UK and non-UK residents will be taxed on gains on their disposals of interests in commercial property, including disposals of  UK property-rich entities. This change marks an expansion to the scope of the current capital gains tax (CGT) rules.

The Current Rules

Under the rules in force up to April 2019, investors in funds are generally treated as holding shares in a company and so their interest in the underlying assets of the fund is disregarded for UK tax purposes.

Subject to the remittance rules, and depending on each individual’s circumstances, when investors residents in the UK dispose of their fund interests (eg their units), CGT is generally payable on any gain realised.

However, to date non-UK resident investors in commercial property have generally been outside the scope of this tax liability. As a result, a non-UK resident holding units in a UK qualifying property fund may suffer no UK tax on the capital growth of their investment.

The New Regime

Under the CGT changes which come into effect on 6 April 2019 (NeRegime), UK resident investors will continue to be exposed to CGT on gains they make on disposals of units they hold in UK property-rich funds.

However, for non-UK resident investors, the position changes:

(i) non-UK resident investors will now generally be liable for CGT on disposals of fund interests (regardless of the type of UK real estate assets those funds possess), and

(ii) non-UK investment funds may become subject to UK tax on any gains they realise at fund level on direct or indirect disposals of all UK property assets (subject to the possible exemption discussed below).

As a result of these changes, a non-UK resident who invests in an offshore investment fund which, in turn, invests in any type of UK real estate, could potentially suffer UK tax leakage at fund level and at individual investor level. UK property investment funds such as Property Authorised Investment Funds (PAIFs) and Real Estate Investment Trusts (REITs) will continue to enjoy exemption from tax at fund level, making them potentially more attractive than their non-UK equivalents from a tax perspective (as they will not suffer the tax charge highlighted at point (ii) above).

Relief and Exemptions

However, following consultation certain relief measures will be introduced for offshore funds which are broadly equivalent in nature to a UK REIT or PAIF where they make disposals of UK real estate assets. Such offshore funds may make an election to HMRC to apply relief measures to ensure that they are not taxed at fund level on gains under the New Regime.

This should bring the tax treatment of most offshore property funds broadly into line with UK REITs or PAIFs. Investors in such funds (whether UK resident or non-UK resident) will be liable to UK CGT on gains realised on their units, just as they would be in a UK REIT or PAIF. However, as previously stated, there will be no CGT liability at fund level.

The pros and cons of Property Funds

Typical profile

(i) Investment funds such as REITS, PAIFs and their international equivalents are typically used to pool the resources of multiple, unconnected individual investors.

(ii) The  day-to-day decisions are taken by specialist fund managers, who must comply with numerous regulatory requirements.

(iii) Funds are generally not suitable for smaller, closed investment  opportunities, where other vehicles such as companies or partnerships may be more appropriate.


(i) Fund-specific exemptions available under the New Regime prevent  investors from suffering potential double taxation on disposals of UK real estate assets. Both REITs and PAIFs (and non-UK equivalents that make an election) will benefit from a tax exemption on any gains they realise at fund level. This is in contrast to investors in alternative vehicles, such as companies, who might suffer UK tax both at fund level and on disposals of their shares/units.

(ii) Both REITs and PAIFs have their own existing tax benefits. For example, they may be structured so as to be exempt from tax on income profits from rental businesses as well as from capital gains at fund level.


(i) Regardless of whether a fund has made an exemption election, individual investors will be liable for any gains realised by the funds on UK property assets regardless of whether they are non-UK resident. Unlike investments in companies, investors will not get exemption from this tax charge by virtue of their interest in the vehicle being under 25%.

(ii) REITs and PAIFs and their offshore equivalents must distribute all their annual net income. This may limit investment discretion and flexibility and 20% withholding tax may be imposed on these distributions (subject to exceptions).

(iii) To qualify as a REIT or foreign equivalent, the prospective company must meet strict requirements including: (i) it must have diverse and widely held ownership; (ii) at least half of its income must come from long term property investments; and (iii) a high proportion of its annual income must be distributed to investors.

(iv) UK PAIFs have similarly strict requirements including: (i) they must be genuinely available to a large number of unconnected persons; (ii) no company can own an interest of 10% or more in them; and (iii) they may not be party to non-standard loan arrangements.

(v) The use of REITs, PAIFs or other international equivalent funds requires rigorous compliance with financial services regulations. There may be strict rules governing things like who must run the fund, who may invest in it and what investments it may make. These can significantly increase the compliance and cost burden and may make funds unattractive for smaller scale ventures.


Funds offer certain  CGT advantages over other vehicles, if structured correctly. For example, the ability to remove any CGT leakage at fund level may be valuable to prospective investors.

However, the broad nature of the new CGT regime means that it is impossible for most investors to completely avoid a CGT charge on disposals which realise value from UK real estate.

Whether a fund is the most appropriate solution depends primarily on each investor’s commercial priorities. For example, those looking to make a debt investment, or seeking to avoid intense regulatory scrutiny will find funds less  suitable, whereas equity investors looking to leverage the skills of professional managers and pooled resources will find funds more attractive.

Investors looking for alterative structures could consider partnerships, trusts and/or corporate vehicles. The right strategy will depend on each individual’s  commercial and personal circumstances.

If you require further information about anything covered in this briefing note, please contact James Bromley or Russell Cohen, or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, March 2019

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