Trading in and developing UK land – levelling the playing field

Trading in and developing UK land – levelling the playing field

At the time of the Brexit referendum it would be easy to have overlooked the publication of some new clauses in the Finance Bill (which are in force from 5 July) concerning profits from either dealing in or developing real estate in the UK using offshore entities.  This followed on from the technical note published by HMRC at the time of the Budget which sought to counteract the three routes used to keep profits from developing UK land from being subject to UK tax.

The three areas addressed by the legislation are:

  1. Offshore companies developing real estate in the UK but which have no “Permanent Establishment”;
  2. Fragmentation – splitting up development roles to circumvent UK tax law; and
  3. Enveloping – selling wrapper entities which develop real estate rather than the real estate itself.

The technical note setting out HMRC’s intentions had also asked for comments on the proposals and British Property Federation amongst others gave comments from the real estate industry. There were rules in this area already, but the new legislation widens these, possibly too much. 


Real estate assets are usually held either as investment assets to exploit a rental stream of income and hopefully obtain capital growth, or trading assets for example development situations where an entity will purchase land, construct a building and immediately sell it; property trading where existing properties are purchased with a view to immediate resale would also fall into the category of trading rather than investment.

The UK tax treatment of investment assets is usually fairly clear in that to a large extent it will depend on whether the person making the disposal of an asset is resident in the UK for tax purposes.  If they are then capital gains tax/corporation tax on capital gains would apply, and if they are not a UK tax resident then there would be no tax.  This distinction has recently been changed in relation to residential property, with the introduction of non-resident capital gains tax.

In relation to trading the position is more complex.  A company which is tax resident in the UK will be taxed on any trading profits.  A non-resident company will be liable to UK corporation tax on any trading profits from a trade it carries out in the UK through a permanent establishment.  Finally even if the company is non-resident and does not carry on a trade through a permanent establishment in the UK it can have a residual liability to UK income tax on its UK source trading profits. While there are equivalent rule changes to income tax, focusing on the corporation tax change will serve to illustrate the issues here. 

What structures have been used and what has been the effect?

As above, a UK resident company will pay tax on all of its development profits.  The question was therefore whether there is a route to pay a lower amount of tax using any offshore structures.  The sort of structure which has brought about the new legislation involved establishing a company in a well-chosen offshore jurisdiction, such as Jersey, and appointing UK contractors to develop land owned by the Jersey company.

The argument runs that the Jersey company would only be subject to UK tax if:

  • it was UK resident (the Jersey incorporated company would be Jersey resident unless central management and control are exercised in the UK); or
  • be carrying on a trade through a permanent establishment in the UK.  With the correct choice of jurisdiction comes a double tax agreement (DTA) which does not include a building site within the definition of ‘permanent establishment’ (i.e. this is a departure from the standard OECD double tax agreement); or
  • it has a source of UK trading profits (again, a well-chosen jurisdiction DTA with the UK will not preserve the UK’s right to tax profit from UK land).

Therefore the argument runs that a Jersey company effectively carrying out development cannot be taxed in the UK on development profits.

HMRC have never fully accepted this position and also now have diverted profits tax in their armoury if needed. Nevertheless they clearly felt the need to put the position beyond doubt and extend the law, the territorial scope of UK tax and, for good measure, change the benign DTAs which were being exploited. 

Amending Relevant DTAs

The DTAs between the UK and Jersey, Guernsey and the Isle of Man have been changed with effect from Budget Day 16 March 2016, to bring this into line with the OECD Model. 

The income of a person in the state of residence (e.g. Guernsey for a Guernsey company) deriving from real estate in the other state (UK) is only taxable in the state where the real estate is located. 

Gains from real estate may be taxed by the source state e.g. UK for UK real estate. 

Finally, gains from disposals of shares or comparable interests (e.g. unit trusts) which derive at least 50% of their value directly or indirectly from real estate in the source state, then the source state (UK) can tax it. 

In tandem with these changes one element of the new UK tax rules counteracts tax advantages including any obtained by DTAs if the advantage is “contrary to the object and purpose of the treaty” – a phrase which puts a smile of barristers’ faces, as there are likely to be a number of views as to what the purpose of the treaty is.

New UK Rules – main provisions

New UK legislation is drafted in what appears to be a fairly effective way in that it adds a completely new head of charge separate from taxing profits from trading through a permanent establishment in the UK and instead charges a non UK resident company to corporation tax if it carries on a trade of dealing in or developing UK land.

The taxing provisions of the new rules apply where certain persons realise profits or gains from disposals in UK land and certain other conditions are met.

The persons in question are first those acquiring holding or developing land, but also as the law is widely cast, anyone associated with that person at a relevant time (the period from when activities begin to 6 months after the disposal) as well as any person party to or concerned in arrangements to realise profits or gains by indirect methods using a series of transactions.

Here it is worth noting that the test for being associated is cast more widely than most of the UK legislation designed to catch avoidance situations.  The usual control tests apply but also any entities which have their results consolidated for accounting purposes or even have a 25% common shareholder are caught. 

In addition one of conditions A to D below must be met in relation to the relevant land, these being as follows:

  • condition A is that the main purpose, or one of the main purposes, of acquiring the land was to realise a profit or gain from disposing of the land.
  • condition B is that the main purpose, or one of the main purposes, of acquiring any property deriving its value from the land was to realise a profit or gain from disposing of the land.
  • condition C is that the land is held as trading stock; and
  • condition D is that (in a case where the land has been developed) the main purpose, or one of the main purposes, of developing the land was to realise a profit or gain from disposing of the land when developed.

These new provisions are draconian and yet should be effective against the sort of development structures which have been used in the past to try and circumvent a UK tax charge.  The worrying aspect of it is is that there is no clear line where trading stops and investment starts, i.e. this legislation could in theory be used to tax investment gains by non-UK entities, which would be a matter of extension of the territorial scope of UK tax.  

Various industry voices have called for guidance in that HMRC need to set out that genuine investment situations are not under threat. There have been some helpful remarks by HMRC, though some will be claiming that non-UK resident entities will be ‘taxed by law, and untaxed by concession.’ It is expected that HMRC will have reserved the extra powers to tax gains rather than trading income in borderline situations where either the threat of the legislation being used might be enough to prevent certain structures being used, or if they are then HMRC would be more sure of victory in any dispute.


Wherever anti-avoidance legislation is brought in, there will always be the reaction in some quarters as to whether even the new law can be neatly circumvented.  Fragmentation, as the name suggests, is where the overall functions of holding, developing and selling are split.  No entity which is within the new tax realises a large part of the profits.  Another offshore entity carries out the development and siphons off most of the profit (though within the limits of the transfer pricing legislation), though not becoming UK resident but rather making use of UK third party sub-contractors.

The argument would then run that a landowning company will pay the new tax, but on a much reduced level of profit, and the developer company is only supplying services and does not strictly deal in or dispose of any land so is not strictly caught by the new tax.  The new provisions counter this by setting out that if one company is trading in property and another associated company provides finance or professional services then profits or gains which will be taxed are deemed to be what would have been the profit or gain if the two entities were not distinct but that everything had been done by the landowning company.


Enveloping is where there is an indirect disposal of land via selling the entity which owns it.  If a company develops a property with the intention of keeping it and letting it, then it can be argued that that company was not trading for tax purposes but rather had a long term investment aim.  If the owner of the shares in that company disposes of the shares, it can sell the shares without there being any real estate disposal and if it is not carrying out any kind of trade in the UK, it should not be taxed. 

There are existing rules known as the ‘transactions in land’ rules which are designed to ensure that enveloping does not secure a tax advantage.

Under the new rules, the profits of a trade of dealing in and developing UK land will be taxable where:

  1. A person realises a profit or gain from the disposal of any property (the word here being used in its widest possible sense and includes share disposals) which at the time of the disposal derives at least 50% of its value from land in the UK;
  2. The person is a party to or concerned in an arrangement concerning some or all of the land; and
  3. The main purpose, or one of the main purposes, of the arrangement is to be able to develop the land and realise a profit or gain from a disposal of property deriving whole or part of its value from that land.

While under the previous rules there was no limit on how much land the investment vehicle must hold before the anti-enveloping rule applies, now it has been increased to 50% of the value of the shares being derived from UK land.  The definition of disposal has been widened so that going forward, disposal will include any case where property is effectively disposed of by one or more transactions or by any arrangement.


From the statements made by HMRC and the breadth of the legislation, it is clear that they are taking no chances and HMRC are weary of avoidance structures in this area.  

The inevitable question is whether HMRC have given themselves  powers which are so wide as to create uncertainty in relation to offshore entities holding UK real estate as an investment. Offshore investors would be well advised not to throw away any documents showing their intention to invest rather than to trade. 

Overall the new rules create further uncertainty in a post-Brexit market.  Any further guidance to the effect that these powers will only be used in situations where HMRC perceive avoidance and not to attack genuine investment activity would be welcome.