UK taxation of chargeable gains on property arising to non-residents - Time to make a transparency election?
Finance Act 2019: The story so far
The UK government introduced tax on gains realised by non-residents from 6 April 2019 on direct and certain indirect disposals of UK commercial real estate held as investments.
At the same time, a specific regime was introduced for offshore funds. To benefit from this regime, offshore funds need to make either a transparency election or an exemption election.
This note does not consider the exemption election and applies only to offshore unit trusts which existed and held UK real estate prior to 6 April 2019. By far the most common such vehicle is a JPUT and the remainder of this note focuses exclusively on JPUTs.
For more general information on the 6 April 2019 changes, including the exemption election, please see our previous article available here.
This note focuses on: (i) the transparency election; (ii) the consequences of making one; and (iii) why investors should consider making one before it is too late.
Jersey property unit trusts
This note is aimed at investors in single asset structures where UK real estate is held as an investment in a JPUT or double-JPUT structure.
Holding UK real estate through a JPUT is attractive as no stamp duty land tax arises on any sale of units in the JPUT. Stamp duty land tax would apply on a direct disposal of the asset by the JPUT.
Unitholders in JPUTs which existed prior to 6 April 2019, should they wish to do so, must make a transparency election prior to 5 April 2020 or they will be unable to do so.
Transparency election
The transparency election is important for investors, not necessarily to improve their own tax position but to preserve exit flexibility on future indirect sales.
Who can make a transparency election?
The election is available to offshore collective investment vehicles which are UK property rich and which are transparent for income tax purposes, including JPUTs.
The transparency election is irrevocable and requires the unanimous consent of unitholders.
Consequences of making a transparency election
The effect of the election is to treat the JPUT as a partnership so that each unitholder is deemed to own a fractional share of the underlying assets. Accordingly, a direct disposal by the JPUT of UK land is treated as a direct disposal by each of the unitholders (see Figure 1).

Why it matters for investors
Exempt Investors
The effect of the election is that on a direct disposal by the JPUT of UK land, the transaction will be treated as an exempt disposal by the tax exempt unitholder directly, rather than a taxable disposal by the trustees of the JPUT.
Taxable investors
The election will have little effect for a taxable unitholder. Making a transparency election will simplify the calculation of gains on an indirect sale of units. This is because that transaction will, once the election has been made, be treated as the sale of the underlying real estate and the gain will be computed using the April 2019 base cost of the asset without any need to value the units separately.
Where making the election will be important is in terms of exit flexibility
The key point here is that if the JPUT was already in place and owned its UK real estate asset on 5 April 2019 then no transparency election can be made after 5 April 2020.
Not making an election before 5 April 2020 means that exit flexibility on a subsequent sale of units (which is attractive as there is currently no SDLT on such sales) will be restricted because the units in the relevant JPUT will be unattractive to exempt investors (such as sovereign wealth funds, charities and pension funds).
Without a transparency election, the JPUT will be a "tainted vehicle" as any future sale of the asset by the JPUT will be taxable at the level of the JPUT as opposed to being treated as a disposal by the exempt unitholders with no charge to tax.
Action point
Investors in single asset structures where the real estate asset is held in a JPUT or double-JPUT structure should consider whether to make the Transparency Election as soon as possible and speak to their relevant Ashurst contact for further advice.
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Readers should take legal advice before applying it to specific issues or transactions.