HMRC has confirmed that a new double tax treaty that was signed by the UK and Luxembourg last year has been ratified by both countries and entered into force on 22 November 2023 subject to certain implementation dates summarised below. Of particular interest are changes to the capital gains article which may significantly impact the taxation position of Luxembourg resident investors in UK real estate. Time is running out for such investors to review their investment structures and take steps in reliance on the former treaty to shelter gains on a reorganisation.

Changes to capital gains article

The previous UK-Luxembourg double tax treaty prevented the UK from taxing gains on disposals by Luxembourg residents of interests in UK property-rich vehicles. However, the renegotiated treaty reverses this position. Going forward, gains accruing to Luxembourg residents on the disposal of shares (or interests in a partnership or trust) that derive more than 50% of their value directly or indirectly from UK real estate will be taxable in the UK.

Under UK tax law, gains arising on the disposal of UK property rich vehicles (in this case, deriving at least 75% of their value from UK real estate) have been taxable since 2019. Accordingly, the changes to the UK-Luxembourg treaty will only, in practice, impact structures meeting this 75% threshold.

Entry into force

The treaty will take effect in the UK from:

• 1 January 2024 in respect of taxes withheld at source
• 6 April 2024 in respect of income tax and capital gains tax
• 1 April 2024 in respect of corporation tax.

Comment

These changes have been on the cards for a number of years. Nonetheless, their impact on the taxation of Luxembourg investors in UK real estate may be significant as there is no 'grandfathering' of existing structures. 

Such investors therefore have a limited opportunity to review their investment structures to mitigate any adverse consequences of the new rules. In particular, we are seeing a number of structures moving to REIT status prior to 1 April 2024 to take advantage of the current position for the conversion and then the REIT regime going forward.

Find out more

To discuss the issues raised in this article in more detail, please reach out to a member of our Tax team.