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As a result, the period over which there is a taper from full income treatment to full capital gains has been condensed to the point where it is almost unnecessary:
















This does seem to be a bit complicated, for five months of tapering.


Some new rules have also been introduced for specific types of fund:


a)  Real Estate Funds now have specific rules to aggregate acquisitions of land and subsequent investments in the property or acquisitions of adjacent land.  These are deemed to be made at the time of the original acquisition. Disposal is not deemed to occur until 50% of the value of the land at its maximum point have occurred.  A fund is regarded as a Real Estate Fund if more than 50% of the total value invested is in land and more than 50% is in investments held for 40 months or more.


b) Fund of funds can treat their investments in other collective investment schemes as an investment rather than adopting a "look through approach".


c) Direct lending funds may qualify for capital treatment if they are in the form of a partnership and achieve a preferred return of 4% (rather than the previously proposed 6%).




The general reduction in the Capital Gains Tax rate, as discussed above, does not apply to carried interest so the rate remains at 18% for basic rate and 28% for higher rate.


There is considerably more complexity in the detail - the legislation stretches to over twenty pages.  Anyone with, or considering, a carried interest scheme needs to take professional advice.


Base Erosion and Profit Shifting


The  OECD launched an Action Plan to tackle international tax avoidance at the request of the G20 Finance Ministers in July 2013. This will have a major impact on cross-border real estate investors. We have been monitoring this and our general updates on the OECD Base Erosion and Profit Shifting Action Plans can be found here.


Two aspects of UK implementation were covered in the Budget and are in the Finance Bill:


a)  Hybrid and other mismatches

b)  Interest deductibility


These are discussed in more detail below.


Hybrid and other mismatches


Action against hybrid mismatch arrangements is intended to target arrangements that exploit a difference in the tax treatment of an entity or instrument in the hands of the payer and the recipient to produce a mismatch in tax outcomes. This is usually because they are in different tax jurisdictions. Such structures are not as widely used in the real estate investment management industry as in some other investment areas, although some funds have used hybrid instruments or vehicles, for example to convert interest deductions at the local asset level to dividend income in the hands of investors.

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