Ready to support managers around new UK CGT rules

March 12, 2019

As well as the 29 March, the 6 April 2019 is another fast-approaching date of note – the date from which non-resident capital gains tax (“NR CGT”) will be payable on both commercial and residential property disposals, whether direct or indirect.  

There is a rebasing to market value or historic cost if this provides a better outcome which given current valuations may be the case.

These changes will affect all offshore entities that derive at least 75% of their gross asset value from UK land. Rules will be introduced to avoid inter-company artificial boosting of non-land assets. For investors with less than 25% ownership disposing of their interest in the property holding entity for two years preceding the sale there is no tax consequence.
Jersey collective investment entities have key decisions on two elections that need to be fully considered.  These options stem from a period of positive consultation between the UK authorities and a range of industry stakeholders, including the JFA, and are designed to prevent the potential for multiple layers of tax in structures.

Transparency election

Current entities such as Jersey Property Unit Trusts (“JPUTs”) can elect to become transparent for NR CGT.  This means there will be no tax at the JPUT level but there will be for unitholders. This will clearly benefit those investors that qualify for an exemption from UK tax such as pension funds.

Exemption election

Provided not ‘close’ and having to abide by certain reporting requirements, then a collective investment vehicle and the structure beneath can elect to all be exempt for NR CGT.  

This will prevent multiple layers of tax within a structure, irrespective of the investors’ tax standing. Currently, there is no threshold and all investors, unless exempt, would be taxed on a disposal of their interest.

There now needs to be a period of consideration of the pros and cons of the elections and reporting requirements balanced with the tax profile of the investors and their anticipated exit from an investment.  

Meanwhile, it should be noted that a further change will be Corporation Tax returns from 6 April 2020 with the need to consider interest deductibility and year ends ahead of the change.

Jersey offers a range of regulated structures all able to utilise these elections, which can be used by investors (whether exempt for UK tax or not) to invest collectively in UK real estate.

For this reason, it is fully expected that Jersey, which has developed huge experience and expertise and created a highly sophisticated regulatory environment for cross-border real estate investment over many years, will continue to provide a compelling proposition for UK-focused real estate fund structuring.

Indeed, the expertise Jersey can offer will be absolutely vital in supporting managers with the new rules and advising them around the options now open to them.

According to figures from the Jersey Financial Services Commission, the net asset value of real estate assets held in Jersey fund structures was £40.7bn as at 30 September last year, reflecting growth of 79% over the past five years.