Taxing gains made by non-residents on UK immovable property

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1 To: 16 February 2018 Introduction 1. The BPF represents investors in UK real estate an industry which supports more than 1 million jobs and contributed more than 65bn to the economy in 2016, equivalent to 4% of the UK s GVA. We promote the interests of those with a stake in the UK built environment, and our membership comprises a broad range of owners, managers and developers of real estate as well as those who support them. 2. The real estate industry provides the infrastructure and places in which people can live, do business and relax. Indeed, it is very hard to imagine how the modern economy would work if there wasn t anyone to provide it with appropriate physical space. As a creator and funder of that space, the real estate industry is uniquely placed to shape the UK s future and to support long-term economic growth and increased productivity across the UK. 3. The consultation proposals could have a significant impact on the UK real estate market. While a third of all investment in UK commercial real estate comes from overseas investors, many more investments are either backed by overseas capital or involve an overseas entity somewhere in the investment structure. Accordingly, we estimate that well in excess of 140bn 1 of investment into UK commercial real estate will be impacted by the proposed measures. 4. We therefore welcome the opportunity to comment on the government's proposals but would like to note our disappointment that such a significant change to the tax rules affecting such a large proportion of investment in UK real estate was not afforded a policy consultation, particularly given the potentially significant adverse consequences for exempt investors and the impact on collective investment. Starting the consultation process at this late, technical stage affords little time to address the concerns and challenges outlined in our response below. 5. Going forward we would strongly encourage government to take a holistic view of real estate tax and avoid constant tinkering with the tax rules. Such chopping and changing undermines the stability that real estate investors need when deciding whether to commit large amounts of money to development and regeneration projects. We would welcome being part of a more holistic discussion on the taxation of UK real estate. 6. Our primary concerns and recommendations are set out below, with our more detailed submission contained within the appendices as follows: Appendix 1: Response to consultation questions Appendix 2: Typical real estate investment structures 1 That is, roughly one third of the total value of UK commercial investment property, see PIA Property Data Report 2017

2 Key concerns and recommendations 1. The government must prioritise stability and certainty in the tax and regulatory environment 7. Almost every fiscal event in recent years has included proposals to change the tax environment for real estate investment. This industry is now subject to some 25 taxes across the lifecycle of a property from purchase and refurbishment, through leasing and sale, to demolition and redevelopment. In the last two years alone, investors have had to deal with fundamental changes in interest deductibility, loss offset, the non-resident landlord regime and changes to SDLT - and now taxation of gains. 8. As stability in the tax environment for real estate investors is increasingly threatened, sentiment is gradually eroded. A sense of stability and certainty is crucial for real estate investors and developers who are typically making very long-term investment decisions. Constant 'tinkering' also results in worse policymaking; certain proposals may at a point in time be irrelevant to particular stakeholders (and so they do not feed in to the process) but subsequently become very relevant, at which point it is too late. (The recent changes to SSE are an example of this see para 17 for further details). 9. The government must therefore provide a period of stability in the tax system in the coming years, to allow recent changes to bed in and prevent further deterioration in investor sentiment. 10. We would also recommend that any future tax policy changes are made with a more holistic view of how real estate is taxed in the UK. This means taking into account all taxes that apply to real estate across the lifecycle of a property, rather than considering separate taxes in isolation We would welcome being part of a more holistic discussion on the taxation of UK real estate. It would also be helpful for investors and businesses if they could have a better understanding of the government s long-term plan and general direction of travel for real estate tax. 11. In this context, it is important to acknowledge that the UK already taxes real estate more heavily than all other OECD countries. Property taxes accounted for 12.5% 2 of UK s total tax take in 2015, more than twice the OECD average. The consultation proposals put a further differentially negative tax burden on investing in UK property relative to our OECD peers. 2. Housing and regeneration: uncertainty in the tax environment is hampering other government initiatives 12. Eroding investor sentiment by continually changing the tax rules will ultimately hamper government s ability to achieve its other policy objectives. We are already aware of investors who are cancelling or postponing their decision to invest in new build to rent housing until there is greater certainty regarding the tax treatment of their investment. At the very least, these proposals have created uncertainty which will delay much needed investment into housing and other development projects. At worst, the UK risks investors choosing to deploy their capital elsewhere which becomes increasingly likely the longer investor uncertainty remains. 13. We are also concerned that these measures will take effect the week after we formally leave the European Union. At a time when the UK's unsettled political and economic position is giving overseas investors serious pause for thought about putting their money in the UK, the government should be 2 OECD (2018), "Revenue Statistics: United Kingdom", OECD Tax Statistics (database).

3 doing what it can to continue to attract investment into our towns and cities and to show that it is open for business to overseas investors. These proposals risk doing precisely the opposite. 3. Exempt investors must benefit from the same tax relief whether they invest collectively or directly in UK property 14. The benefits of collective investment in generating economies of scale and accessing professional investment expertise are widely acknowledged. 3 This is especially true for real estate - given its bulky and illiquid nature, it is particularly common for investors to pool capital and share risk and expertise. We are therefore very concerned that the proposals could result in exempt investors being taxed on collective investment in UK real estate where they would not have suffered such tax had they invested directly. 15. As such, it is imperative that the design of the consultation proposals supports collective investment in UK real estate and provides tax transparency for exempt investors where they invest collectively. Ideally, any new rules should achieve this outcome without requiring existing collective investments to be restructured. We believe that the most effective solution involves increased transparency for existing real estate investment vehicles with appropriate reporting requirements by the fund to HMRC. More details are included in our response to Chapter 6 in Appendix Although outside the scope of this consultation, we believe there is merit in the government considering whether the UK tax and regulatory environment could better support collective investment into UK real estate for instance by creating a new type of UK-domiciled tax transparent real estate fund and we would be glad to be part of this discussion. 4. The definition of Qualifying Institutional Investors within the Substantial Shareholding Exemption should be reviewed in light of these proposals 17. For more than 50 years, overseas investors in UK real estate have been accustomed to an exemption from capital gains tax by virtue of being non-resident. As such, the recent consultation and subsequent changes to the Substantial Shareholding Exemption and associated definition of a Qualifying Institutional Investor (QII), would not have seemed very relevant for most institutional investors in UK real estate and infrastructure. The government will have missed out on significant stakeholder engagement from this cohort of investors when crafting the new SSE rules and the QII definition. 18. This means that the QII definition excludes swathes of overseas institutional investors including many overseas pensions funds, insurance companies, charities and not-for profit endowments that are exempt from tax in their own jurisdictions. Given that the main policy objective of the recent SSE changes was to promote the UK as a place for global investors to establish and manage their investments in trading businesses, infrastructure projects and real estate, it is important that the SSE and definition of QII is reviewed to account for the impact of the proposals under consultation. We look forward to discussing our comments with you in more detail. Please do not hesitate to get in touch if you require further information. Rachel Kelly, Senior Policy Officer (Finance) British Property Federation, St Albans House, Haymarket, London SW1Y 4QX ; rkelly@bpf.org.uk 3 Including in the government s recently published UK Investment Management Strategy II

4 Appendix I: Response to consultation questions Chapter 2: Scope of the Measure Question 1) Are there any issues specific to non-residents when considering how they fit into the UK definitions of persons chargeable to UK tax (CGT or CT)? 19. Considering the government s objectives to achieve parity in treatment between UK and overseas investors, the treatment of offshore entities where there is no comparable UK equivalent tax payer will create some challenges for government in establishing how such vehicles should be taxed. 20. Furthermore, the objectives of this measure will need to be balanced with other government objectives; in particular, the government s Investment Management Strategy, which aims to encourage to collective investment in the UK. Our full concerns and recommendations in respect of collective investment in UK real estate are addressed in our response to chapter 6. Question 2) Do you see any issues or complications arising with respect to rebasing which need to be addressed? 21. There is a disparity in rebasing options for rebasing real estate assets compared to shares in property rich entities. Sellers of assets can choose either historic cost or April 19 values, while for sellers of shares, there is only the option of the April 19 value. There should be consistency here to ensure investors have commercial flexibility and optionality whether they choose to make an asset or share disposal. 22. Investors will also incur costs on rebasing so it is important that clear guidance is provided by HMRC on what evidence of valuation will be acceptable. It should be noted that given the timing of the rebasing, coinciding with our exit from the EU; it is possible that transactional activity will be much lower around this time which could make valuation more challenging than usual. Chapter 3: Direct disposals Question 3) Do you agree with the basic principle that gains on direct disposals within these new rules should be computed using the same computational rules as other chargeable gains? 23. No comment. Question 4) Further to the specific modifications identified, are any other changes needed to recognise differences in how the tax system applies to non-residents? 24. No comment. Question 5) For businesses: Will the proposals for direct disposals mean that your company will now be required to register for UK CT? 25. See response to question 10.

5 Question 6) For businesses: Will the proposals for direct disposals lead to an increase in your administrative burdens or costs? Please provide details of the expected one-off and ongoing costs. 26. By its nature, this measure will increase the administrative burden non-resident investors haven t previously had to track chargeable gains or base cost as they were exempt. Furthermore, there will be one-off cost implications, particularly if ixbrl accounts are required to be filed. Question 7) For individuals: Will the proposals for direct disposals mean that you will be required to pay Capital Gains tax for the first time? 27. No comment. Chapter 4: Indirect disposals Question 8) Do you consider that the rules for indirect transactions are fair and effective? 28. We have some concerns in respect of the rules for indirect disposals which are set out in more detail below. 25% ownership test: 29. We are concerned that the 25% ownership test based on ownership on any day in the 5 years before sale could create some potentially anomalous results which do not reflect an investor s ownership throughout their period of ownership. It would be worth considering an average ownership test to address this or alternatively for the test to apply where the investor has had a 25% holding for at least 2 years over the last 5 years, for example, to address any one off anomalous results. We are particularly concerned about the risk of deterring seed investment capital as any initial investors in a fund would by default breach the 25% test, regardless of their holdings after the fund is fully seeded. The concept of final close is widely recognised in the sector as the period after which a fund is fully seeded and funded. We would recommend that holdings before this point are excluded from the 5-year look-back test. Acting together rules/ partnerships 30. It is important to make sure that partners in a partnership are not deemed to be connected, simply by virtue of being partners in the same partnership. Government should also confirm that investors in funds would not be treated as acting together simply because of a common investment policy, or a common manager of the fund, or participating in the same fund closing. If these issues are not resolved, it would severely hamper collective investment into real estate. Rebasing 31. As noted in our response to question 2, there is a disparity in rebasing options for rebasing real estate assets compared to shares in property rich entities. Sellers of assets can choose historic cost or April 19 values, while for sellers of shares there is only the option of the April 19 value. There should be consistency here to ensure investors have commercial flexibility and optionality, whether they choose to make an asset or share disposal.

6 Risk of double taxation/latent gains 32. There a risk of double taxation if a vendor makes a share sale disposal and pays tax on that gain but the base cost of the asset in the company remains low. If the new owner of that company chooses to sell the asset at a future date, the base cost would not reflect the true value that had been paid for the asset and a part of that gain would already have been subject to tax by the previous owner. If this issue is not resolved, owners of property rich companies may be restricted to just sell the property company rather than the underlying asset in the future. Property rich test 33. The property rich definition (>75% of gross value) could leave some investors with some uncertainty over whether their investment is taxable. 34. It could be particularly challenging for some businesses with an element of operating activity. Although it s possible that the sale of shares in such a company would continue to get SSE because it is trading, it would be helpful if owner occupied business premises could be excluded from the valuations. 35. Goodwill and intangibles are inherently hard to measure which will create uncertainty around whether the 75% threshold is breached. It is also important that goodwill or intangibles are considered whether they are on the balance sheet or not as it s typically not possible to put a market value on something like goodwill until a disposal event. 36. Government should provide clear guidance for property rich operating groups around how gross value should be measured and what evidence will be acceptable. Question 9) Are any other conditions necessary to ensure the policy is robust in meeting the objective of taxing non-residents on gains on indirect disposals? 37. Some consideration will need to be given to the how HMRC will ensure that the tax is reported and paid for overseas indirect disposals. 38. There will also be more complex transactions, such as a merger where perhaps two property owners bring their properties together in exchange for shares in a new company, but where there are no cash proceeds exchanged. The rules should ensure that such share for share type transactions should not result in a taxable event. Question 10) For businesses: Will the proposals for indirect disposals mean that your company will now be required to register for UK CT? 39. Many overseas landlords will be required to register for CT from April 2020 as a result of the forthcoming changes to the Non-Resident Landlord (NRL) regime. Unfortunately, these changes will mean that overseas investors that make sales in the 2019/20 tax year will be required to register for CT one year earlier and furthermore, will be required to comply with both CT and income tax for that period. This seems disproportionately onerous; hence we would recommend that the new measures to tax gains are delayed to coincide with the wider changes to bring NRLs within CT from April Alternatively, those companies that make disposals in the transitional year could be given the option of doing a stand alone CGT calculation, rather than having to register for CT if this would be very onerous for them.

7 40. There will also be a strange outcome in relation to capital allowances unless the implementation date for income and gains changes can be aligned. For those companies that are subject to income tax on their rental profits but corporation tax on their gains in the transitional year, they may not be able to offset any balancing allowance against their gain as a UK company would be able to. This would be an inequitable outcome and again, we would reiterate our recommendation to delay the implementation of the gains changes until 2020, to align with the income tax changes. Question 11) For businesses: Will the proposals for indirect disposals lead to an increase in your administrative burdens or costs? Please provide details of the expected one-off and ongoing costs. 41. It is impossible to assess the administrative burdens and costs on indirect disposals until it is clear how gains on disposals by collective investment vehicles (CIVs) with exempt investors will be treated and in particular, whether the rules will allow gains to be attributed to investors such that they are taxed based on their individual characteristics. The administrative burden could be considerably higher if the rules do not allow for such tax transparency. Our fuller response on CIVs in contained within Chapter 6. Question 12) For individuals: Will the proposals for indirect disposals mean that you will be required to pay Capital Gains tax for the first time? 42. No comment. Chapter 5: Disposals of residential property Question 13) Do you consider that it is right to harmonise ATED-related CGT given the changes proposed in this document? 43. We agree it would be a sensible simplification to remove ATED CGT and to harmonise the rules for gains on disposal of property. Question 14) Are there any issues, risks, or complexities created by harmonising the ATED-related CGT rules in the manner proposed, and how can these be addressed? 44. No comment. Question 15) For businesses: Will the proposals for disposals of residential property mean that your company will now be required to register for UK CT? 45. See response to question 10. Question 16) For businesses: Will the proposals for disposals of residential property lead to an increase in your administrative burdens or costs? Please provide details of the expected one-off and ongoing costs. 46. See response to question 11. Question 17) For individuals: Will the proposals for disposals of residential property mean that you will be required to pay Capital Gains tax for the first time? 47. No comment.

8 Chapter 6: Collective Investment Vehicles Question 18) Do you agree with the general approach to ownership of non-residential property through CIVs outlined above? 48. Given its bulky and illiquid nature, collective investment in real estate is perhaps more important than for any other asset class. Both widely held collective investment into real estate and more closely held joint venture arrangements are prevalent in real estate investment. 49. We do not think that the suggested rules as outlined in chapters 4 and 6 will support collective investment into real estate in the UK, particularly by exempt investors, and will ultimately result in investors paying more tax if they invest collectively than if they invest directly. If these concerns are not addressed, this would be detrimental not only for the level of investment in our towns and cities, but also for the investment management industry more broadly. 50. A compromise may be needed between the objectives of this consultation (to achieve parity between UK and non-uk investors in real estate) and wider government objectives which recognise the benefits of collective investment in housing and regeneration and seek to support the investment management industry, such as the government s Investment Management Strategy. New rules should result in greater tax transparency for existing investment structures 51. While a third of all investment in UK commercial real estate comes from overseas, many more investments either backed by overseas capital or involve an overseas entity somewhere in the investment structure. 52. As such, it is imperative that the design of the consultation proposals supports collective investment in UK real estate and provides tax transparency for exempt investors where they invest collectively. Ideally, any new rules should achieve this outcome without requiring existing collective investments to be restructured. We believe that the most effective solution involves increased transparency for existing real estate investment vehicles with appropriate reporting requirements by the fund to HMRC. 53. At present, the use of vehicles which are transparent for income tax purposes but opaque for gains are very common in the sector. Luxembourg Fonds Commun de Placement (FCPs), Jersey Property Unit Trusts (JPUTs) and similar Guernsey and Isle of Man vehicles are particularly prevalent because they are flexible, fairly lightly regulated and can accommodate a range of investment strategies. 54. With that in mind, we believe that the new rules should work with existing structures and allow existing fund vehicles, like JPUTs, to elect to be treated at transparent for gains. This would provide exempt investors with the opportunity to calculate their own tax liability and access the appropriate tax exemptions that they are entitled to. It is important to make sure that such treatment would be by election only as there may be cases, particularly where there are hundreds of investors in a fund, where the administrative burden of being treated as transparent for gains would be disproportionately onerous for both the taxpayer and HMRC. As such, the rules would need to allow broadly for three options:

9 1.1. Either allow a fund to be completely transparent for gains which would naturally come with additional reporting obligations to ensure HMRC have relevant information regarding the investors in the fund Or, allow the fund to remain opaque for gains and either: Allow the fund to pay tax on the full gain if all investors are nonexempt Or allow the fund to calculate the tax charge based on the proportion of exempt and non-exempt investors in the fund. 55. It will also be necessary to address any risk of double taxation or dry tax charges where an asset is sold lower down an investment structure. We would recommend a form of group relief or roll over relief to encourage reinvestment of proceeds into UK real estate. Tiers of holding entities in a fund risk of double tax charge roll over relief needed 56. While tax transparency at the fund level will help to prevent discrepancies between how exempt investors are taxed should they invest directly or collectively; there are commonly several tiers of holding entity between the fund vehicle and the underlying real estate assets. Typically, holding entities are used either to avoid cross collateralisation of risk between investments, or to achieve structural subordination in financing arrangements that involve lenders with different levels of security over the borrower's assets. While one or two lenders against each asset is common there may be cases where an asset has three or four lenders, each requiring their own SPV. 57. Accordingly, the rules should provide the same sort of optional transparency or proportional exemption to entities within a real estate investment structure as we are proposing for real estate fund vehicles. Clearly any such election would come with additional reporting obligations to HMRC to ensure that it has sufficient information on the ultimate investor. 25% ownership test - acting together rules 58. We support the requirement for an investor to have a >25% interest in a fund in order to be subject to the new rules. It seems sensible to ensure that investors with very little control or oversight in an investment are not caught by these rules and it will be a helpful provision to support widely held collective investment funds. 59. Clauses were included in the NRCGT and corporate interest restriction rules to clarify that partners in a partnership will not be deemed to be acting together simply by virtue of being partners in the same partnership and it will be important to ensure that similar clauses are included in this legislation. The relevant clause in the NRCGT legislation is paragraph 8 Schedule C1 TCGA, although we would suggest replacing the acting together provision with the rule in s.465(4)-(6)tiopa which has been used for the interest restriction rules and importantly excludes funds under the same management.

10 60. Without such a clause, much collective investment into real estate would be severely hampered by these rules as it would prevent otherwise independent investors from coming together and pooling resources without suffering the tax charge. Note on the recent statutory instrument on the CGT treatment of a tax transparent fund 61. We suggest that HMRC clarifies the intended CGT treatment of a "tax transparent fund". The specific issue is whether an offshore fund which is a transparent fund (within section 103D(1)(b) TCGA 1992) and which does not beneficially own its assets would continue to be outside the scope of UK CGT on gains on disposal of UK property after April A "tax transparent fund" would include not only an authorised contractual scheme in the UK (which is a co-ownership scheme) but also certain types of offshore fund (which are open-ended and transparent), such as a Luxembourg FCPs or JPUTs. The common feature of these vehicles is that the fund does not beneficially own its assets. For example, in the case of an FCP the manager holds the assets on behalf of the unitholders and in the case of a Jersey unit trust, the trustee holds the assets on behalf of the unitholders. 63. This statutory instrument will help some existing real estate funds achieve the right exemptions from taxation at the fund level to ensure that investors can be subject to tax when the sell the units in the fund but it will not provide the right tax outcome for all existing funds and investors in UK real estate as many of them will not be offshore funds. It would be helpful if this statutory instrument could be broadened to capture and provide a similar tax outcome for all existing real estate funds or at least to allow existing funds to opt into equivalent treatment. Question 19) Will the proposals for CIVs mean that you will now be required to register for UK tax? 64. No comment. Question 20) Will the proposals for CIVs lead to an increase in your administrative burdens or costs? Please provide details of the expected one-off and ongoing costs. 65. It is very difficult to predict the additional administrative burden or costs without knowing exactly how the rules will end up working for collective investment in real estate. It is important that the rules do not end up taxing exempt investors for investing collectively where they would not have been taxed had they invested directly. This should be regardless of whether they choose to invest alongside nonexempt investors or only with other exempt investors. While we appreciate that this may require additional reporting and compliance obligations, it is important that these are not so onerous that exempt investors are left with no choice but to invest only with other exempt investors, or worse, choose not to invest collectively at all. 66. There may also be transaction and other costs (including tax) if structures need to be reorganised as a result of the new rules. Question 21) Are there changes needed to the rules for CIVs, particularly around exemptions, to ensure a robust system of taxing non-residents on gains on disposal of interests in UK property? 67. As noted in the introduction, because overseas investors into UK real estate have been accustomed to an exemption from gains on the basis of their residency for over 50 years, they have never had to

11 consider an exemption on any other basis. As a result, we believe there are many institutional investors, particularly North American pension schemes, charities and endowments, who are exempt from tax in their own jurisdiction, but - because they have never had to worry about it - would not necessarily qualify for the same exemptions in the UK. 68. By imposing tax on such investors, the consultation proposals will make it increasingly harder for them to achieve comparable returns in the UK relative to their home jurisdiction, or other investment jurisdictions where they qualify for an exemption and are able to achieve tax transparency on their investments. We would recommend two main actions for government to consider in light of this consultation: Review the Qualifying Institutional Investor (QII) definitions in the SSE rules, to make sure that they are appropriately targeted to attract global institutional capital into real estate and infrastructure in the UK Review the processes for exempt investors to apply for and qualify for exempt status in the UK. Initial feedback suggests that this process is not simple or straightforward which is critical to ensure that administrative burdens do not create a barrier to investment in the UK. Question 22) Are there any specific circumstances where the treatment of gains on non-residential UK property should be different to the treatment of gains on UK residential property in the context of a CIV? 69. What constitutes commercial real estate by professional investors has become increasingly broad in recent years now encompassing large scale investment in housing products like student accommodation, build-to-rent homes and elderly living accommodation. We believe that the tax rules should apply consistently for collective investment in both residential and non-residential property as any differences in tax treatment not only creates complexity for investors but could also influence where an investor seeks to allocate capital. Question 23) Do you have any further comments on the taxation of gains on non-residential UK property held through CIVs? 70. No comment. Chapter 7: Reporting and compliance Question 24) Do you foresee any difficulties with the reporting requirements for the seller? 71. There will be scenarios where is will be difficult for a seller to know whether they are liable for a tax charge, particularly if they are selling shares in a fund, or even a fund of funds with some investments or joint ventures in UK real estate further down the structure. Guidance will be required to assist taxpayers and their advisors facing these more complicated scenarios. Question 25) Do you foresee any difficulties with the charge on the UK group company? 72. No comment.

12 Question 26) Do you agree with the proposal to use the normal CT Self-Assessment framework? 73. No comment. Question 27) Will the proposed information and reporting requirements lead to an increase in your administrative burdens or costs? Please provide details of the expected one-off and ongoing costs. 74. No comment. Question 28) For third-party advisors: what is the best way to ensure the proposed information and reporting requirements do not lead to an undue increase in your administrative burdens or costs? Please provide details of likely one-off and ongoing costs in respect of any options or proposals. 75. As currently proposed, there is wide concern that the third-party reporting rules would result in a significant number of reports given how many advisors can be involved on both the buyer's and seller's side of a transaction. This would not only create a significant administrative burden on advisors, and potentially high costs to clients, but also result in a deluge of reports to HMRC. 76. There should be greater clarity around which advisors have a duty to report. Furthermore, it would be easier if the requirement to report was based on a series of facts or criteria avoiding the need to apply judgement as to whether they think a transaction has taken place which has a CGT liability. In particular, it will be difficult to for an advisor to know whether or not a vendor is acting together with another party; whether they ve have met the 25% test in the last 5 years; whether they breach the property rich test, etc. 77. We would suggest that one advisor should be nominated by the seller at the beginning of a transaction as the advisor with responsibility to report - and this should be made known to other advisors and HMRC. Where the UK nominated representative is a UK lawyer or tax advisor, the obligation to report for other advisors should fall away. 78. Where advisors are not made aware of a nominated UK advisor with a duty to report, the reporting obligations should be simplified as follows: The advisor should only be required to notify HMRC about a potential transaction without the need to form a judgement around whether the transaction has taken place or whether or not there is a tax liability If the seller has historically complied with their taxes within the Non-Resident Landlord Regime (and if they re able to provide a current UTR), they can be assumed to be low risk from a tax compliance perspective and advisors would not need to report unless they had reason to believe that non-compliance was likely. Question 29) What channels and methods should HMRC use to raise awareness of this change in the law, to ensure that affected non-residents will know that they are impacted? 79. No comment.

13 Other comments onshoring 80. Given the level of tax changes impacting UK real estate in recent years and in light of this fundamental change to the tax treatment of overseas investors in particular, investors are increasingly interested in onshoring their investment structures. 81. However, under current rules this would be very difficult to achieve without incurring a substantial SDLT cost. Indeed, this alone makes it very unlikely that much onshoring will take place. The UK government should therefore consider how best to help investors that are looking to onshore existing structures, such as enhancing the existing SDLT seeding relief or creating a new type of UK domiciled tax transparent fund for real estate investment.

14 Appendix 2: Typical real estate investment structures This appendix sets out two examples to illustrate some of the more typical real estate investment structures and sets out some of the reasons the different types of structures that are used. The appendix includes: 1. A widely held investment structure 2. A closely held/joint venture investment structure Example 1: A widely held investment structure Investors (Diverse range of investors from multiple jurisdictions) Investors Investors invest via a fund to pool resources and achieve economies of scale, to spread risk and to access professional investment and portfolio management services. Master Feeder Fund Master Feeder Fund This vehicle is usually a transparent entity. Investors like to invest in a transparent vehicle to ensure that they are taxed according to their individual tax attributes. Holding Company A holding company is required in order to consolidate all of the underlying real estate investments. The administration and financing of the property portfolio may also be carried out by the holding company. Local holdco SPV Holding Company SPV SPV SPV Country B Country C Country D Individual investors may not have the expertise or scale to carry out the administration in respect of their individual investment, so it makes more sense to carry this function out centrally. It is not uncommon for a local holding company to be used in the same jurisdiction as the investment, as illustrated with the investment in Country A. SPVs and investments Individual real estate assets are often directly owned by a special purpose vehicle or holding company. This allows flexibility when selling the asset e.g. the ability to sell a proportion of the asset rather than the whole asset. It also allows for specific borrowing at the level of the asset if required. Country A

15 Example 2: A closely held/joint venture style investment structure The investors: In this case, where there are fewer investors pooling large amounts of capital, the investors could be exempt or non-exempt institutions or some other large scale professional investor. The Fund Vehicle: This would typically be a JPUT or a Lux FCP, or a partnership to allow transparency given the professional nature of the investors, it is not necessary for the fund to be a regulated vehicle offering protections in the same way that a fund being offered to retail investors would be needed. Country hold Co: If the fund invests in lots of jurisdictions, quite often they will have a separate Hold Co. in each jurisdiction where they have investments. Prop. Cos: It is common for each individual asset to have a separate property company to avoid cross collateralisation of risk with other assets. Where there is more than one lender, there will also typically be a separate SPV/Prop Co for each lender.