Delay to New UK-Luxembourg Double Taxation Treaty: Impact on Investment in UK Real Estate

On 7 June 2022, the UK and Luxembourg signed a new Double Taxation Treaty (the New DTT), which was ratified by the UK on 12 October 2022.

The New DTT contains various changes, including the removal of the exemption of Luxembourg resident investors from UK tax on chargeable gains in respect of the sale of indirect holdings in UK real estate.

The New DTT will enter into force when the UK and Luxembourg have each notified the other that their relevant domestic legal procedures have been satisfied. Although it was anticipated this would occur in 2022, the New DTT is not yet in force.

The New DTT will have effect in respect of UK tax on chargeable gains, for financial years beginning on or after April of the calendar year after the year in which the New DTT comes into force. The earliest effective date for these provisions of the New DTT will now therefore be in April 2024.

This gives Luxembourg investors an unanticipated additional period of at least 12 months to take advantage of the exemption from UK tax on chargeable gains in respect of sales of indirect holdings in UK real estate.

Given the high level of Luxembourg investment in UK real estate, this development is highly significant to a large number of businesses owning indirect UK property holdings through a Luxembourg platform, which may now want to reconsider selling those holdings.

If you would like to discuss this development and how Eversheds Sutherland can assist, please do not hesitate to get in touch with one of the contacts listed below.