Non-Resident Capital Gains Tax – overview and application to CIVs

Non-Resident Capital Gains Tax

A summary of the key features of the legislation and complexities that need to be considered on a case by case basis for Collective Investment Vehicles.


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From April 2019 non-UK residents will be subject to UK tax on gains arising from direct or indirect disposals of all types of UK land and interests in UK property rich entities. This is a significant expansion of the current Non-Resident Capital Gains Tax (NRCGT) rules which apply in only limited circumstances to direct disposals of residential properties. It therefore represents a fundamental change to the existing regime. This is a topic that will impact all overseas investors in UK property, including real estate funds. In this article, we have summarised the key features of the legislation but note that there are intricacies and complexities in the legislation that need to be considered on a case by case basis.


Unless an exemption applies, a non-resident will be subject to UK tax on gains arising from disposals made on or after 6 April 2019 of:

  • Interests in UK land; and
  • Interests in entities deriving at least 75% of their value from UK land (i.e. ‘UK property rich’ entities) where the investor has a 25% or more interest in the property rich entity. 

However, the 25% de minimis will not be applicable in the case of interests in UK property rich collective investment vehicles (CIVs) (see below).

Where an investor makes a chargeable disposal, they must report this disposal and make a payment on account of the capital gains tax due within 30 days.


To ensure that only gains in respect of appreciation in value after 6 April 2019 are subject to UK tax, there will be a rebasing for tax purposes for both direct and indirect interests in UK land on 5 April 2019. It will however be possible to elect for historical cost to be used when calculating gains, where this is greater than the 5 April 2019 valuation. For indirect disposals, where historical cost is used and it gives rise to a loss rather than a gain, the loss is not allowable for offset against any other gains.

Whilst we understand that HMRC will not necessarily require formal valuations to have been undertaken at 5 April 2019, we recommend that investors consider what valuation evidence they have available to support April 2019 valuations, if it is possible to value both direct and indirect interests in land and whether this needs to be bolstered. We expect that such valuation evidence will be important in the case of a future challenge from HMRC and/or in the case of a due diligence where a property rich entity is disposed (e.g. when negotiating a latent capital gains tax discount with a future purchaser). 

Applicable tax rates

Non-residents realising chargeable gains post 5 April 2019 will be taxed as follows: 

  • Non-resident companies will be subject to corporation tax at 19% (17% from April 2020)
  • Non-resident individuals disposing of non-residential property will be subject to capital gains tax at 10% or 20%, depending on their marginal rate. Gains realised on disposal of residential property will be subject to capital gains tax at 18% or 28%, depending on their marginal rate. 
  • Non-resident trusts disposing of non-residential property will be subject to capital gains tax at 20%; whereas gains realised on disposal of residential property will be subject to capital gains tax at 28%.

Available exemptions

Certain classes of investors will be outside the scope of NRCGT, including sovereign immune investors and overseas pension schemes that meet specific criteria. In addition, qualifying institutional investors (QIIs) that qualify for enhanced relief under the Substantial Shareholdings Exemption (SSE) rules will be able to benefit from relief from NRCGT where they (or entities owned wholly/partly by QIIs) dispose of UK property rich entities (with no requirement for the entity to be trading), provided the SSE conditions are met. QIIs include registered pension schemes, life assurance businesses, sovereign wealth funds, charities, investment trusts, authorised investment funds and exempt unauthorised unit trusts. 

Interaction with tax treaties

HMRC recognises that the UK’s taxing rights under certain double tax treaties may not allow the UK to tax all non-resident investors (depending on their jurisdiction of residence) on gains that they realise from the disposal of UK property rich entities. Whilst this is unlikely to be the case for direct disposals of UK land, there are certain tax treaties that do not include a securitised land provision, and hence do not allocate taxing rights to the UK for gains realised on the disposal of property rich entities. The most notable tax treaty that does not currently have a securitised land provision allocating taxing rights to the UK is the UK-Luxembourg treaty, however we understand that this is currently being re-negotiated. 

Anti-forestalling rules apply and will allow HMRC to counteract tax advantages arising from the provisions of double tax treaties, where the tax payer has entered into abusive arrangements (from November 2017). 

Trading exemption

The legislation provides for a specific exemption from NRCGT in relation to the disposal of companies that are UK property rich, but where this property is used for trading purposes. Whilst the legislation is drafted quite widely on this point, we understand that HMRC expects this exemption to apply where there is a disposal of an ongoing trade where UK property is amongst the assets. It would be sufficient for the qualifying trade to be carried on by a company connected with the UK property rich company, but the seller must have the expectation for the trade to be carried on for a significant period of time following the disposal (here we understand that the purchaser or a member of the purchaser’s group would be expected to carry on the qualifying trade). 

Collective Investment Vehicle (CIV)

HMRC has responded to the property industry’s concerns about inequitable results for collective investment vehicles, by creating a specific subset of rules to determine how the NRCGT rules should apply to UK property rich CIVs. The purpose of these rules is broadly to exempt gains on disposals made by CIVs but to tax the investors on the disposal of their holdings in the CIV. The definition of a CIV is broad and includes the following:

  • Collective Investment Schemes as defined in s235 FSMA 2000, including limited partnerships
  • Alternative Investment Funds per Reg 3 AIFMR 2013 (SI 2013/1773)
  • UK REITs
  • Non-resident companies with features similar to UK REITs

Entities that fall to be CIVs per this definition will by default be treated as companies for the purposes of the NRCGT rules, with the exception of partnerships. 

A CIV will be treated as property rich where a disposal of an interest in that CIV would be treated as a disposal of a UK property rich asset, deriving 75% or more of its value from UK property. 

Investors in UK property rich CIVs will not benefit from the 25% de-minimis ownership exemption, such that all disposals of interests in UK property rich CIVs will be within the scope of NRCGT (subject to the availability of any relevant exemptions).

There are two elections that can be made in respect of CIVs: a transparency election and an exemption election. 

Transparency election

A transparency election can only be made by an offshore income transparent CIV (e.g. JPUTs and Lux FCPs). By making a transparency election, the CIV will be treated as a partnership for NRCGT purposes (but not other taxes), hence pushing the level of taxation up to investors. Making a transparency election eliminates commercial concerns of investors suffering a discount for latent capital gains where CIVs are disposed of and also allows investors in the CIV to benefit from any exemptions that they may be entitled to.

Statement of Practice D12 (SP D12) will apply to determine how chargeable gains are calculated in respect of transparent elected funds. In this respect, we note that care should be taken to fully understand the consequences of making this type of election and how tax charges could arise on changes of investors in the CIV, their respective interests in the CIV and on disposal of their interests in the CIV. Notably, HMRC’s current interpretation of SP D12 could result in investors disposing of an interest in a transparent elected CIV being taxed on proceeds equivalent to any actual consideration received, plus the investor’s proportionate interest of the balance sheet value of the CIV’s underlying assets. 

The election is irrevocable and all investors must consent to the election being made. The time limit for making the election is 12 months from the CIV first becoming UK property rich (or by 5 April 2020 for a UK property rich CIV in existence at 5 April 2019). The election will apply retrospectively to cover disposals from 5 April 2019 or the date the CIV is formed, if later. 

It is expected that the transparency election will only be suitable for CIVs that have a limited number of investors, where those investors are not expected to change over time. 

Exemption election

The exemption election can be made by a CIV which is a qualifying UK property rich company or by a partnership (including a UK partnership), in respect of one or more UK property rich companies that it owns (provided it owns at least 99% of the shares).

In order to make the election one of the three following conditions must be met: (1) the CIV must meet the genuine diversity of ownership condition (as defined in the Offshore Funds (Tax) Regulations 2009); or (2) the entity is a body corporate, not close, and its shares are regularly traded on a recognised stock exchange; or (3) The company must meet the non-close condition and the UK tax condition.

Non-close condition

  • Companies will meet the non-close condition if they are (1) not controlled by five or fewer investors, or (2) are so controlled but only because one of the investors is a qualifying institution. Note that the qualifying institution must itself be non-close.

UK tax condition

  • To meet this test the manager of the CIV must reasonably believe that, should all of the assets of the fund be liquidated and the proceeds returned to investors at that point, no more than 25% of the total value so returned would not be subject to UK tax in the hands of the investors, because of the allocation of taxing rights under Double Tax Treaties.

The exemption election has the effect of exempting the CIV and its subsidiaries from capital gains tax in relation to direct and indirect disposals of UK property. Instead tax is applied at investor level on disposals of interests by investors in the CIV and on returns of value from the CIV. Entities disposed of by an exempt elected CIV will benefit from a market value rebasing on disposal by that CIV, thus eliminating the requirement for latent CGT discounts and hence preserving the value of the exemption election for indirect disposals.

Once the election is made, the fund manager must commit to report certain information to HMRC on an annual basis. The election does not require unanimous investor consent and may therefore be used by widely held funds whose fund managers, are willing to take on the additional reporting and compliance burden associated with making this election. In order to offer investors a structure that does not suffer iterative tax charges in relation to UK property gains and allows exempt investors to access this exemption.

There is no time limit for making the election, but the election must specify the date from which it is to have effect, being a maximum of 12 months before it is made. The exemption election is revocable by fund managers, but a revocation will result in a deemed disposal and reacquisition of all investors interests in the CIV and any chargeable gain would result in an immediate tax charge for such investors.

Where the qualifying conditions for the election cease to be met, there is also a deemed disposal and reacquisition of all investors interests in the CIV, but any tax on gains arising is held over until the investors receive funds in respect of their interest in the CIV, or if earlier, three years from the date of deemed disposal or the date of winding up of the fund.

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