A new double tax treaty that was signed by the UK and Luxembourg in June has now been ratified by the UK. Although not yet in force, the treaty may significantly impact the tax position of Luxembourg resident investors in UK real estate. Such investors should therefore review their investment structures as the earliest opportunity.

Changes to capital gains article

The current UK-Luxembourg double tax treaty prevents 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) which 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

Although the new treaty has been ratified by the UK, it will not come into effect until both countries have notified each other that their domestic legislative processes are complete. The earliest it will enter into force (for UK corporation tax/capital gains tax purposes) is therefore April 2023.

Comment

Although these changes are not unexpected, they may significantly impact the taxation of Luxembourg investors in UK real estate, especially as there is no 'grandfathering' of existing structures. Such investors should therefore review their investment structures in advance of the treaty's entry into force to mitigate any adverse consequences of the new rules.

Find out more

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