Gulf sovereign investments may be hit by new UK tax plans

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• Foreign sovereigns are currently exempt from tax on UK income
• Reforms tabled for April 2024
• Experts divided on impact on foreign investment to the UK

Gulf-based sovereign wealth funds could see tax exemptions on investments in the UK slashed under new proposals put forward by the British government.

Britain is planning to reduce the scope of the exemption to just interest income from investment activity. 

This would move income profits and capital gains from investment in UK real estate, as well as profits from trading in property, into the taxable bracket.

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Currently, foreign sovereign persons – including heads of state, monarchs and SWFs – are exempt from direct taxation on all their UK income.

The UK has launched a consultation that proposes reforms from April 2024 to “clarify the rules and ensure they deliver better value for money for UK taxpayers”.

The consultation, which runs to mid-September, will look to provide more clarity to investors by putting the UK sovereign investment tax regime into statute law.

The government said it does not expect the proposals to negatively impact overall investment but experts are divided on the potential impact.

London-based legal advisors MacFarlanes cautioned SWFs to “pay close attention to these proposals and how they develop through the consultation process”. 

In an advisory note written by tax policy specialist Bezhan Salethy, senior counsel Kirsten Prichard Jones and senior solicitor Sarah Shucksmith, the company said the “surprise” announcement could have “significant implications”.

They noted: “While the expression ‘sovereign immunity’ might conjure images of bejewelled monarchs, in reality the main beneficiaries of immunity are state investment organisations such as SWFs or state pension funds, which invest government resources for the benefit of their populations.

“UK investments – particularly real estate – have historically been popular with SWFs, which collectively have tens of billions of pounds invested in UK assets.

“The surprise announcement that the government is consulting on reforms to sovereign immunity is not therefore a niche interest – it will potentially have significant implications for investors, investment managers and the UK’s attractiveness as an investee jurisdiction.”

Global law firm Bryan Cave Leighton Paisner agreed and said it would be a “material change and is likely to change how sovereigns invest in UK real estate”, adding: “This is a big announcement, and unexpected.

“Sovereigns should consider their structures to see how the changes could impact on them.”

UK would not risk losing Gulf billions

But Neil Quilliam, associate fellow at Chatham House’s MENA programme, told AGBI: “The changes are highly unlikely to impact future Gulf SWF investments in the UK, as they form part of a wider strategy to deepen relations and ensure continuing co-operation on critical issues, such as technology, renewables, education, sustainable finance and medical advancements.”

Henry Faun, partner, head of Middle East Private Office at real estate consultancy Knight Frank, added: “The consultation seeks to bring the UK into line with other major global economies such as the US and Germany.

“Whilst the UK government does not expect the proposals to have a material impact on foreign investment into the UK, we feel that any simplification and clarification can only be positive for sovereign investors looking to the UK for future investment.”

And Raghu Mandagolathur, CEO of Marmore Mena Intelligence, agreed, saying that it was unlikely the UK would put at risk the billions of pounds of inward investment from the Gulf region.

Last month the UK and Qatar signed a strategic investment partnership which will see Qatar invest up to £10 billion over the next five years in key sectors including fintech, zero emissions vehicles, life sciences and cyber security. 

And last September, the UK Office for Investment and Abu Dhabi’s Mubadala Investment Company also signed an agreement to commit £10 billion in investment to sectors including technology, infrastructure and energy transition.

This built on Mubadala’s £800 million commitment and the UK Government’s £200 million to UK life sciences when the partnership was established in March.

Mandagolathur said more than a quarter of infrastructure investment in the UK by state owned investors has been from the Middle East, adding: “Considering the UK’s interest in GCC sovereign investors both in terms of current and future investments, it is likely that the tax regime would be structured so as to not negatively impact GCC investment in UK.”

The consultation looks to improve the targeting of exemptions that are available to sovereign investors, bringing the UK into line with other major economies such as the US and Germany.

Lucy Frazer MP, financial secretary to the Treasury, said: “As the world continues to evolve, we are committed to ensuring the UK keeps pace and remains a competitive, attractive place for foreign investors.

“Our reforms will provide more clarity on the tax exemptions on offer to sovereign investors, while also ensuring they deliver better value for money for UK taxpayers.”

As with many other countries, such as the US, France and Australia, the UK provides exemptions from some taxes, such as corporation tax and income tax, to sovereign investors, reflecting their unique status as government-backed institutional investors.

These exemptions, however, are not codified into UK law, but are based on case law and common practice.

The UK government is therefore looking to codify its regime into statute law to make the UK system more predictable and certain for foreign sovereign investors.

Reforms will look at what types of income are exempt of tax to ensure they are more targeted towards income that relates to investment rather than trading activities, and income that is more passive in nature.

It will also ensure the UK’s tax exemptions remain as competitive as those of comparable countries.

The importance of Gulf SWFs to the UK

Oman: In January the UK and Oman signed a Sovereign Investment Partnership (SIP), agreeing to work closer together on increasing high value investment into both countries. The memorandum of understanding between the UK’s Office for Investment (OFI) and the Oman Investment Authority (OIA) aims to strengthen economic ties and identify and support commercial investments in areas such as clean energy and technology, which are already an important part of the £1 billion-a year trading relationship.

Qatar: In June the UK and Qatar signed an SIP which will see Qatar invest up to £10 billion over the next five years in key sectors of the UK economy, including fintech, zero emissions vehicles, life sciences and cyber security. The investment is expected to create high-quality jobs in new industries across the country. UK-Qatar trade was worth £4.8 billion last year and Qatari investment in the UK economy is already estimated to be worth over £40 billion.

Saudi Arabia: In March Prime Minister Boris Johnson met Saudi Crown Prince Mohammed bin Salman. They committed to boost cooperation in defence, security, trade and culture, welcoming a new UK-Saudi Strategic Partnership Agreement and a major investment announced by the Alfanar Group in green aviation fuel in Teesside.

UAE: In September 2021 the UK Office for Investment and Abu Dhabi’s Mubadala Investment Company signed an agreement to significantly expand the UAE-UK SIP, a framework for investment announced in March 2021. Over the next five years an extra £10 billion was added to the SIP across sectors including technology, infrastructure and energy transition.