1. © 2016 Grant Thornton UK LLP. All rights reserved. UK Real Estate & Tax 19 May 2016 Kersten Muller and Melissa Ng Grant Thornton UK LLP

2. © 2016 Grant Thornton UK LLP. All rights reserved. Agenda 1.Recent tax developments 2.UK real estate structures 3.Future tax developments 4. Chinese investment in UK real estate

3. © 2016 Grant Thornton UK LLP. All rights reserved. Recent tax developments

4. © 2016 Grant Thornton UK LLP. All rights reserved. Recent tax developments Significant changes to the taxation of UK real estate, in particular residential property –SDLT at tiered levels up to 12%, additional 3% rate for 2 nd homes and investment properties –Complex interaction with multiple dwellings relief ATED and ATED-related Capital Gains Tax –ATED now applicable for properties worth £500k or more –Return was due on 30 April 2016! –Value at 1 April 2012 or purchase, revaluation on 1 April 2017 –Min ATED is £3,500, max £218,200 Non-Resident CGT from April 2015

5. © 2016 Grant Thornton UK LLP. All rights reserved. Recent tax developments Budget changes to property development activities undertaken by non- UK companies Taxation of property development and trading now based on situs of the asset, i.e. the UK Aims to 'level the playing field' between offshore companies and UK companies Offshore companies will be subject to UK Corporation Tax on development/trading profits at UK Corporation Tax rates, currently 19% No legislation available yet but consultation with HM Revenue & Customs on provisions Extensive anti-avoidance provisions aimed at stopping restructuring ahead of legislation being available

6. © 2016 Grant Thornton UK LLP. All rights reserved. Offshore property development structure

7. © 2016 Grant Thornton UK LLP. All rights reserved. Offshore property development structure Typical offshore property development structure Relied on there not being a Permanent Establishment in the UK and so UK tax not being applicable to development profit UK tax law to be amended to bring such profits within the UK tax net Enforceable on or after the date the legislation is introduced in Parliament at Report Stage, which was originally expected to be June 2016 but could now be delayed until October 2016. Anti-avoidance rules in force from Budget Day, 16 March 2016 Treaties with Channel Islands already changed HM Revenue & Customs consulted on new rules; Grant Thornton participated in industry & profession discussions

8. © 2016 Grant Thornton UK LLP. All rights reserved. More detail… New legislation means UK situs activities are subject to tax regardless of whether there is a UK PE This includes: –dealing in any estate, interest or right in or over land in the UK; or –developing any land in the UK with a view to disposing of any estate, interest or right in or over the land. This will include redevelopment Expected to apply in priority to the Diverted Profit Tax Interaction with loss relief and costs incurred pre-commencement

9. © 2016 Grant Thornton UK LLP. All rights reserved. Have they thought of…? …probably yes! Targeted Anti-Avoidance Rules ("TAAR") on "Anti - Fragmentation" and "Anti - Enveloping" came into force immediately –transfer of UK land or property to a related party to increase its base cost and reduce the subsequent profit will be caught –disposal of developed land to independent party or related party who was always intended to be the end user of the land between Budget Day and Report stage should not be caught

10. © 2016 Grant Thornton UK LLP. All rights reserved. Fragmentation

11. © 2016 Grant Thornton UK LLP. All rights reserved. Enveloping

12. © 2016 Grant Thornton UK LLP. All rights reserved. UK Real Estate structures

13. © 2016 Grant Thornton UK LLP. All rights reserved. Trading vs Investment Ever more important to distinguish between "trade" and "investment" activities Property development with the intention to sell at a profit indicates that a trade is being carried on Badges of Trade Intention Number of transactions Modification of the asset in order to make it more sellable Financing arrangements Length of ownership Nature of the Asset Income producing

14. © 2016 Grant Thornton UK LLP. All rights reserved. But watch out for… "Transaction in Land" rules Likely to be applied more widely Already very wide scope and includes scenarios where: −UK land or property is acquired, or −UK land is developed with the sole or main object of realising a profit from directly or indirectly disposing all of part of the UK land. These conditions do not explicitly distinguish between "trading" and "investment" "

15. © 2016 Grant Thornton UK LLP. All rights reserved. But watch out for… (cont'd) Impact on close-ended real estate funds Proposal to remove the requirement for "control" to be disposed could be problematic for bona fide real estate investors and joint venture arrangement. E.g. minority investor in a SPV/ fund sells their interest – difficult to ascertain whether "the sole of main object of realising a profit from disposing of the land" exist when the SPV has not yet disposed of the property.

16. © 2016 Grant Thornton UK LLP. All rights reserved. UK real estate investment Propco (Channel Islands) Investors UK property Bank debt

17. © 2016 Grant Thornton UK LLP. All rights reserved. UK real estate development Devco Investors UK property Contractors UK or Channel Islands? UK tax resident

18. © 2016 Grant Thornton UK LLP. All rights reserved. Future tax developments

19. © 2016 Grant Thornton UK LLP. All rights reserved. What is happening next Interest deduction limitation – interest deductible up to 30% of EBITDA £2m threshold but at what level Group ratio rule can improve the above fixed ratio, subject to a number of limitations Restriction on tax relief for interest payments for individuals

20. © 2016 Grant Thornton UK LLP. All rights reserved. Chinese Investment in UK Real Estate

21. © 2016 Grant Thornton UK LLP. All rights reserved. Chinese environment China's "new normal" growth – annual GDP growth target of 6.5% China's 13 th 5 years plan encourages the development of a more consumer-oriented economy One Belt One Road initiative encourages links and business opportunities with China passing over 60 countries Diversification of assets shifting focus to sustainable, safe returns for the long term overseas

22. © 2016 Grant Thornton UK LLP. All rights reserved. Chinese investment trend Almost $30bn Chinese investment in the UK in the last 10 years Chinese investment in overseas is expected to grow at a compound growth rate of 20.6% in the next 10 years There are more than 1million people with personal wealth of at least £1m at the end of 2014, doubling from just 4 years ago Over the next 10 years wealthy Chinese are expected to invest about 30% of their assets overseas, amounting to at least £300bn

23. © 2016 Grant Thornton UK LLP. All rights reserved.

25. Chinese investment in the City

26. © 2016 Grant Thornton UK LLP. All rights reserved. Why UK One of the top destinations for real estate investment Political stability Stable market Soft power Northern Power House

27. © 2016 Grant Thornton UK LLP. All rights reserved. Experience with Chinese clients Language and culture Trust and relationship Approach to pricing Centralised decision making Risk appetite

28. © 2016 Grant Thornton UK LLP. All rights reserved. Case study – real estate HK listed company purchasing two central London properties in the region of £120m (commercial) and £180m (mixed use) BVI structure Tax structure, capital allowances, transfer pricing, on-going compliance Approach Offshore Investors (HK) LP HoldCo (BVI) PropCo (BVI) Bank Debt Interco Debt

29. © 2016 Grant Thornton UK LLP. All rights reserved. Other examples HNWIs - Tier 1 Investment Visa Succession planning Expat employment tax M&A support On-going audit and compliance support

30. © 2016 Grant Thornton UK LLP. All rights reserved. Contact details Melissa Ng Real Estate Tax Manager T+44 207 728 7114 E melissa.ng@uk.gt.com Kersten Muller Real Estate Tax Partner T+44 207 728 3139 E kersten.j.muller@uk.gt.com

31. © 2016 Grant Thornton UK LLP. All rights reserved. Questions