Sovereign immunity changes: beware of unintended consequences

The CIOT welcomes Treasury proposals to put the UK’s sovereign immunity from direct tax onto a statutory footing, but cautions that potential unintended consequences need to be considered carefully, particularly in terms of the interaction with the tax treatment of UK real estate for non-UK residents and the operation of REITs, the substantial shareholding exemption and the QAHCs regime.

The current policy provides exemption from liability to UK direct taxes for foreign governments, heads of state and sovereign wealth funds and state pension funds, on the basis that one state should not extend its laws to another state. The consultation also proposes to narrow the exemption to UK source interest income only and limit the group of persons to whom the exemption applies.

The CIOT also highlights the proposal on inheritance tax, to restrict sovereign immunity to state property that remains state property after it passes to a successor, meaning that private property and property that ceases to be state property will no longer be exempt.