to provide flexibility to funders rather than for tax reasons). So, for example, a Jersey unit trust could be used as a fund vehicle, holding several subsidiaries and Jersey unit trusts, each of which holds a UK real estate asset.
This sort of multi-tiered structure could be inefficient under the new rules, with a single gain being taxed several times and exempt investors suffering tax leakage. In the example above, if the unit trust fund vehicle disposed of its units in a property unit trust, the gain on this disposal would be taxed. A further charge could arise on repatriation of the proceeds to the ultimate investors, if this is done by way of unit redemption or other capital disposal, as the fund unit trust will be property rich. It is doubtful whether the government will see this as an unfair consequence of the new rules, given that the same double charge would arise on a disposal by a UK company with UK shareholders. It is also unclear how the new regime will interact with recent changes to the CGT treatment of unit trusts that are transparent offshore funds.
Tax leakage can be avoided in some cases by structuring the sale as a disposal by the ultimate investors of their interests in the fund vehicle itself, which would result in a single tax charge for taxable investors and no tax for any exempt investors. However, this will not always be possible, particularly where there is more than one buyer for the fund's assets. Even where a disposal of the holding entity is possible, the price may be discounted to reflect the latent gain in the various vehicles, creating effective tax leakage for investors.
Another way to avoid multiple charges, and tax leakage for exempt investors, may be to hold assets through exempt vehicles such as real estate investment trusts (REITs), property authorised investment funds (PAIFs) and co-ownership authorised contractual schemes (ACSs). These will continue to be exempt from CGT under the new rules. However, disposals of interests in these vehicles by overseas investors will be caught, assuming the property richness and 25% tests are met. These vehicles are likely to become more popular following April 2019; however, they carry with them restrictive regulatory and tax requirements. In particular, the need for these vehicles to be open-ended (in the case of PAIFs and ACSs) and to satisfy genuine diversity of ownership conditions may make them ultimately incompatible with a number of investment strategies and unsuitable as joint venture vehicles.
Double tax treaties
The proposals borrow certain elements and concepts from the transactions in UK land regime, including anti-avoidance measures designed to prevent 'treaty shopping'. The point here is that while most of the UK's double tax treaties reserve to the UK taxing rights on gains from disposals of property rich vehicles, not all do. In particular, the Luxembourg treaty does not allow the UK to tax such gains. Funds based in Luxembourg should be protected from the charge to the extent that they can structure sales as the disposal by Luxembourg vehicles of property holding entities (the treaty does not protect against direct disposals). That said, protection via the treaty could have a limited shelf life, as the government will be keen to amend it.
In addition, the anti-forestalling provision, introduced on Budget day with immediate effect, denies treaty relief where the main purpose of arrangements is to enjoy the benefits of a treaty. This should prevent the mass migration of funds from the Channel Islands to Luxembourg. Those in the process of setting up a fund in Luxembourg before the Budget may feel that non-tax related benefits associated with the jurisdiction mean that the anti-forestalling provision does not apply to them. Any argument that the anti-forestalling provision does not apply will be harder to run following the addition of a 'principal purpose test' to the treaty.
Conclusion
The proposals mark a dramatic change to the CGT regime for non-UK investors, and are likely to lead to both significant reorganisation of exi
