The way in which cross-border investors structured their European property investments relied, until recently, on tried and tested routes, usually using offshore holding vehicles. However, over the past few years, these traditional options have come under challenge from a combination of changes in international tax rules making them less attractive to operate, and more user-friendly domestic alternatives.


Traditionally, collective investment into UK real estate was structured through a pooling vehicle, such as a limited partnership, into a holding company under which country-specific investment structures would be established. The locations of the various levels in the structure would be determined by a number of factors:

  • The pooling vehicle would typically be tax transparent (to avoid an additional layer of tax leakage) and located in a location familiar to the majority of the investors (often the US, certain Caribbean Islands, or the UK). A partnership was often preferred because of the flexibility it offered in meeting differing the requirements of different investors.
  • The location of the holding company was largely tax driven, requiring a low level of taxation in the vehicle itself and access to a wide range of double tax treaties to enable profits to be distributed with minimum tax leakage. For European investments, Luxembourg would invariably be used.
  • The country-specific structures would typically consist of one or more in-country companies. The exception to this, historically, was the UK where quirks in the UK tax regime meant that holding UK property through an offshore company gave rise to a reduced level of tax on property income, no tax on gains on sale, and (if structured as a sale of shares) no Stamp Duty for a subsequent purchaser. 

However, the management of such structures rarely mirrored their legal form; senior management teams would normally sit in New York or London and manage the structure remotely, with only occasional visits to attend board meetings in the holding company jurisdiction.


Following a series of negative press reports when large multinational corporations were found to have structured their tax affairs such that local taxes were routed into jurisdictions with very low domestic tax rates, the OECD published a series of directives aimed at ensuring countries received a level of tax commensurate with the activities being undertaken in their country. These directives have been enacted globally and have included legislation to restrict tax deductions for excessive interest payments, prevent the exploitation of differences in the treatment of financing instruments and legal forms between jurisdictions (“anti-hybrid” measures), and a requirement for minimum levels of substance in holding locations to access double tax treaty and other benefits. These changes have meant that for pan-European property investment, the mismatch between the management and legal structures now poses a real threat to the beneficial post-tax returns previously enjoyed.


The UK enthusiastically embraced the OECD proposals and, in fact, went further by aligning the previously beneficial “non-resident landlord” scheme of taxation with the corporate tax regime, and removing the exemption from tax on gains for non-residents. As a result, the benefit of holding UK property through a non-UK entity largely disappeared. However, whilst the increased focus on the use of tax haven-based pan-European holding companies had put increased focus on the need to demonstrate real substance in such vehicles, any meaningful shift to aligning legal and management structures more closely by relocating such holding companies to the UK was made more difficult by the UK tax regime. The UK had no specific tax regime for companies holding international assets, and the real estate investment trust (REIT) regime for holding UK assets was not cost-effective for many international investors.


Following the UK’s exit from the EU, there was a fear that London might lose its position as a preeminent financial centre. In light of this, the Government launched a review of the taxation of holding company structures. It has also looked in recent years to make changes to the UK REIT regime to make it more accessible. The changes to the REIT rules have focussed on easing the administrative cost of operating as a REIT. They have also made privately held REITs available to sophisticated institutional investors. Finally, although exempt from corporation tax, REITs are required to distribute (broadly) 90% of their taxable profits. Those distributions are subject to withholding tax, usually at a rate of 15%. With corporation tax rates at 19%, it was marginal whether a 4% differential was sufficient to compensate for the additional costs of operating as a listed company under the old REIT rules. However, with the reduced operational costs, and an increase in corporation tax to 25%, the differential is now sufficient to make REITs a more attractive proposition. Whilst the REIT offers tax benefits to holders of UK property, the recently introduced Qualifying Asset Holding Company (QAHC) regime provides similar benefits in respect of non-UK property holdings. A combination of the two regimes, therefore, finally offers international investors a way in which to align the legal and management structures of a pan-European property portfolio in a tax-efficient manner.


It has been clear for some time that there was friction between the historic holding company structure (legally based in a tax haven such as Luxembourg, but in practice managed from London) and the direction of travel for international tax law with its focus on localised management. The UK Government has seized the opportunity to stake a claim to make London the new European centre for holding European property investments. Early signs are that the property industry is welcoming these changes with open arms.

Richard White
ex EY tax partner, ex HMRC tax inspector
Tax Director