Budget: Tax on foreign sovereign investors

Who will be affected

The proposed regime will bring the following overseas sovereign investors into the UK tax net:

• Foreign sovereign states and constituent territories of federal states;
• Heads of state acting in their sovereign capacity;
• Governments and integral parts of government;
• Certain wholly owned state entities;
• Sovereign wealth funds;
• State‑operated overseas pension funds (SOPFs); and
• Certain other governmental organisations and central banks.

Eligibility will not be automatic, HMRC will operate an application process for sovereign tax status.

Proposed exemptions

To maintain the UK’s attractiveness for sovereign capital, while aligning with the general tax regime, the proposed regime will include the following exemptions:

• Interest income - UK source interest will remain exempt from UK tax for qualifying sovereign investors;
• Investment management profits - Profits of UK offices managing the global portfolios of sovereign investors will be exempt from corporation tax, preserving the UK’s role as an asset management hub;
• Chargeable gains - SOPFs will be exempt from UK tax on chargeable gains, mirroring the treatment of other overseas pension schemes. Other sovereign investors will generally be within the UK gains regime on UK land and property‑rich vehicles;
• Dividends - Non‑resident investors, including sovereigns, will usually continue to enjoy UK exemption on dividends; and
• Inheritance tax - UK situated state property of a foreign sovereign or head of state remains exempt; non‑state, personal property does not.

Proposed favourable treatments

In recognition of the role foreign sovereign investors play in the UK investment markets (particularly the UK real estate market), foreign sovereign investors will benefit from specific favourable treatments under the proposed regime. Foreign sovereign investors with fund and real estate structures will attract the following treatment:

• Sovereign investors will be treated as qualifying institutional investors (QIIs) for Qualifying Asset Holding Companies (QAHCs), Long-Term Asset Funds (LTAFs) and the non‑resident capital gains rules for certain collective vehicles;
• SOPFs will qualify as eligible investors for Exempt Unauthorised Unit Trusts (EUUTs); and
• A new ’sovereign REIT holding company’ regime will allow sovereigns to hold controlling interests in UK REITs through a UK company, with property income distributions (PIDs) taxed at a concessional 15 percent rate and bespoke corporation tax rules for the holding company.

Also, sovereign investors will remain QIIs for the substantial shareholdings exemption (SSE), helping preserve the tax treatment of UK investment platforms and funds in which they invest alongside others. However, SSE will not be available to investors with sovereign tax status on disposals of interests in UK property-rich vehicles, consistent with the treatment of direct disposals of UK real estate.

Timing and transitional measures

The proposed regime will include transitional measures aimed at helping those affected to prepare for the changes by restructuring their existing holdings where necessary. These include:

• Rebasing of gains - Assets newly brought into the charge to UK tax on gains will be rebased to their market value on 1 January 2029, limiting tax on historical appreciation;
• Stamp Duty Land Tax (SDLT) relief - SDLT relief, available from 2028 until at least 31 December 2030, will support the restructuring of UK real estate holdings to better align with the new regime (for example, corporate or REIT structures);
• Debt and derivatives - Targeted relief from certain anti‑avoidance rules will be available for corporate debt and derivative contracts used in restructuring triggered by the reform;
• Pre‑trading expenditure - Pre‑trading attributes accumulated under the old regime may be transferred to new entities created in the restructuring process; and
• Status applications - HMRC is expected to accept applications for sovereign tax status at least six months before the new rules take effect

Why it matters

For sovereign investors with existing UK property exposure, this reform is significant for various reasons, such as:

• Direct ownership of UK land will move into the UK tax net, with rental income and (for most sovereign investors) gains becoming taxable. As a result, many sovereign investors may consider moving assets into UK corporate vehicles or REIT structures to access favourable regimes and manage tax leakage;
• Joint ventures and funds will remain viable, but sovereign investors may need to revisit structures to reconsider the mix of QII status, gains treatment and PID taxation, particularly where vehicles are property‑rich;
• The SDLT relief window and gains rebasing provide an opportunity to reshape holding structures before 2029, but will require detailed consideration and coordination across jurisdictions; and
• Sovereign investors will face UK tax registration, filing and withholding obligations (for example, under the Non‑Resident Landlord Scheme) that were previously mitigated by immunity. Robust governance and documentation around sovereign status will become essential.

Overall, the consultation signals a strategic move from broad immunity to targeted relief. Sovereign investors in the UK real estate market wishing to submit a response to the consultation should do so by the deadline of 20 January 2027. Also, sovereign investors should consider undertaking scenario modelling and structure reviews and engaging with HMRC and advisers well ahead of 2029.

If you require support or have any questions, please get in touch with one of the KPMG in the UK contacts listed.

For further information please contact:

• Robert Peel
• Victoria Smallman