Key Takeaways
- • The UK government will extend corporation tax to sovereign wealth funds' directly held UK real estate for the first time, a change expected to raise about £690mn a year by 2029-30, according to the Financial Times reporting cited by Property Week.
- • Gulf states, including the UAE, and funds such as Norges Bank Investment Management and Qatar Investment Authority, are the most exposed given their large UK property holdings and build-to-rent investments.
- • Sovereign funds will receive "unique access" to UK real estate investment trusts at a 15 per cent corporation tax rate, a partial offset for the new liability.
- • The Office for Budget Responsibility called the costing "highly uncertain" due to limited administrative data on the affected group.
- • Legislation is planned for the 2027-28 Finance Bill after a technical consultation, with the new regime taking effect from the start of 2029.
Summary
The UK government announced on Wednesday that sovereign wealth funds will be subject to corporation tax on their directly held real estate investments, extending a levy that already applies to their investments in UK companies. According to the Financial Times, as reported by Property Week, the measure is forecast to raise about £690mn by 2029-30. The government's Red Book projects revenues of £495mn in tax year 2028-29, peaking at £690mn the following year before declining marginally.
The change will affect Gulf states and other sovereign investors that hold significant UK property, including Norges Bank Investment Management and Qatar Investment Authority, which own substantial parts of London. Sovereign investors, including from the UAE, have also invested heavily in build-to-rent housing. Income earned by sovereign wealth and state-backed pension funds had previously been exempt from direct UK taxes on income and gains. Chancellor John Healey said the changes would bring UK rules closer to other countries while keeping the regime "one of the most generous regimes in the world".
To offset the new liability, the government said sovereign funds would gain "unique access" to UK real estate investment trusts at a corporation tax rate of 15 per cent. Corporation tax will also apply to trading income in limited circumstances. The government plans to create a new statutory class of sovereign investor covering foreign states, heads of state, governments, sovereign wealth and pension funds, and central banks.
The real estate industry criticised the proposals. Andrew Teacher, founding partner at Lauder Teacher Associates, said the proposal "risks adding further fuel to the perception that Britain does not want foreign investment". The move also arrives amid strained UK-UAE relations over possible sanctions against Manchester City following a Premier League financial rules breach, which ministers fear could affect future Abu Dhabi investment. A former Treasury minister noted that the previous Conservative government considered changing sovereign tax rules in 2022 but that Sir Jeremy Hunt scrapped the idea in 2023 over concerns about overseas investor backlash.
The Office for Budget Responsibility warned the costing is "highly uncertain" because of a lack of administrative data on the affected group's tax and assets, and said it was unclear how groups would respond to minimise the impact. A technical consultation on draft legislation will precede its introduction in the 2027-28 Finance Bill.
The change will affect Gulf states and other sovereign investors that hold significant UK property, including Norges Bank Investment Management and Qatar Investment Authority, which own substantial parts of London. Sovereign investors, including from the UAE, have also invested heavily in build-to-rent housing. Income earned by sovereign wealth and state-backed pension funds had previously been exempt from direct UK taxes on income and gains. Chancellor John Healey said the changes would bring UK rules closer to other countries while keeping the regime "one of the most generous regimes in the world".
To offset the new liability, the government said sovereign funds would gain "unique access" to UK real estate investment trusts at a corporation tax rate of 15 per cent. Corporation tax will also apply to trading income in limited circumstances. The government plans to create a new statutory class of sovereign investor covering foreign states, heads of state, governments, sovereign wealth and pension funds, and central banks.
The real estate industry criticised the proposals. Andrew Teacher, founding partner at Lauder Teacher Associates, said the proposal "risks adding further fuel to the perception that Britain does not want foreign investment". The move also arrives amid strained UK-UAE relations over possible sanctions against Manchester City following a Premier League financial rules breach, which ministers fear could affect future Abu Dhabi investment. A former Treasury minister noted that the previous Conservative government considered changing sovereign tax rules in 2022 but that Sir Jeremy Hunt scrapped the idea in 2023 over concerns about overseas investor backlash.
The Office for Budget Responsibility warned the costing is "highly uncertain" because of a lack of administrative data on the affected group's tax and assets, and said it was unclear how groups would respond to minimise the impact. A technical consultation on draft legislation will precede its introduction in the 2027-28 Finance Bill.
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