Sovereign wealth funds investing in UK property are set to be saddled with new taxes that will put existing investment structures “firmly under the spotlight”.
Chancellor John Healey and prime minister Andy Burnham
The new sovereign tax status will see foreign governments, heads of state, wholly owned state entities and sovereign wealth funds taxed on income and gains from UK property from the start of 2029.
Labour hopes to soften the blow of ending the longstanding tax-free status of foreign sovereign investors by offering a lower tax rate of 15% for those investing via REIT structures.
The Treasury expects the reforms, announced as part of the Autumn Budget, to raise £690m in 2029-30.
Plans to tax sovereign funds had been considered by the previous Conservative government but were dropped by then chancellor Jeremy Hunt.
“This is a resurrection of a measure that was abandoned in 2022 following consultation,” said Matthew Poole, partner in Gowling WLG’s tax team.
“That was, presumably, abandoned because of fears about a negative impact on investment in the UK at time when capital investment was much needed. It is not clear what has changed now. Sovereign investors are major investors in UK property, and the government acknowledges [that] in the consultation.
“The government’s position is that the UK is an outlier compared to other countries and that the UK will remain an attractive investment proposition ‘comparable to, or more generous than, those provided by most other countries’; while tax is not the only factor when considering where to invest, it is clearly a material one.”
Michael Graham, tax partner at law firm DLA Piper, said: “For sovereign wealth funds with significant UK real estate exposure, this is a substantial change and will put existing investment structures firmly under the spotlight.
“These proposals, pare back and arguably, in practice, abolish most of the benefits of UK sovereign immunity.”
He added: “The direction of travel is clear. The UK is significantly narrowing the tax advantages historically available to sovereign investors in property. That could have major implications for how sovereign wealth funds structure both existing holdings and future UK investment.”
State pension funds that qualify as State-operated Overseas Pension Funds will retain an exemption for capital gains.
Where sovereigns currently invest through UK companies, income and gains of those companies will already be liable to the normal corporation tax regime, and the introduction of the sovereign tax status regime will have no impact.
Labour has launched a consultation on the reforms. The consultation will be followed by technical consultation on draft legislation ahead of final legislation being introduced in the Finance Bill 2027-28.