Luxembourg residents investing in UK real estate

A new double tax treaty, which contains significant changes to the capital gains tax article, was signed by the UK and Luxembourg last month. These changes may impact the tax position of Luxembourg-resident real estate investors holding indirect interests in UK real estate, who could find themselves subject to UK tax on capital gains. Both governments are due to have completed the formal ratification process in April 2023, and allow the UK-Luxembourg double taxation convention and protocol to come into force.

Currently, Luxembourg residents investing in UK property do not pay UK capital gains tax from an indirect disposal of UK property (i.e. disposal of shares in a company holding UK property). As a result, the UK has been looking to renegotiate the treaty with Luxembourg since 2019 when the UK introduced tax on capital gains for non-residents disposing of entities holding UK property. When in force, the treaty will result in the UK taxing gains on disposals by Luxembourg-based entities where 75% of the gross value is from UK property.

These changes will have an important impact on Luxembourg-based real estate investors and will level the playing field between Luxembourg and other non-UK jurisdictions. This may support the continuing trend of onshoring investments in UK real estate through UK-resident structures. Additionally, other options, such as Jersey Property Unit Trusts that have made a transparency election and UK REITs, may be a more attractive investment structure.

Any impacted investors should review their investment structures before the treaty comes into force to ensure they are not adversely affected and understand how the changes impact their position. It is also important to consider how any future acquisitions should be structured.

If you would like to discuss the potential impact this may have on your real estate investments, please get in touch with our real estate team.