Tax risks for the real estate sector

06 April 2018

Real estate funds and other real estate vehicles are often the target of tax authorities due to the size of potential tax liabilities, which may arise in the context of deals and restructurings. As such, tax insurance may be an effective manner in which to manage potential tax risks or liabilities.

Tax insurance policies are used to give protection against financial losses suffered in the event that the insured tax treatment is challenged by the tax authorities. For example, we recently facilitated a real estate tax insurance policy to protect the target (and buyer) against a capital gains tax liability on the transfer of real estate.

In the real estate context, tax risks may often relate to the following:

1. Assets are often sold in the context of realising a longer term investment, or alternatively as trading in real estate. A classification as “trading” may result in higher tax charges in respect of any gain/ profit realised. Tax insurance is often an effective manner in which to remove the risk relating to such a classification.

2. The tax residency of the recipient of proceeds from real estate is often a focus area for tax authorities. If an offshore entity is for example centrally managed and controlled in the UK, it may be regarded as tax resident in the UK and subject to a higher tax. Tax insurance may be used to manage any risk in this regard.

3. Tax law changes may make tax insurance appropriate. For example, in the 2017 UK Budget it was announced that non-residents disposing of commercial real estate may be subject to capital gains tax in the UK going forward. Tax insurance may be appropriate to protect against risks in this regard, or even facilitate any restructurings which may be required to real estate holding structures in the context of the proposed changes.

Tax insurance as a product is evolving and maturing and it is increasingly being used in the context of deals and restructurings, amongst others.

We are even seeing previously uninsurable tax risks, being considered. For example, we recently managed to convince two insurers to provide very reasonable terms for a change of tax law risk in a real estate deal, something which would have been difficult a year ago.

Many insurers have bolstered up their in-house tax expertise in recent years in anticipation of the growth in the use of this product. Premium rates are also steadily coming down. Capacity in the market is increasing, and it is now possible to insure over EUR 500 million for any one risk.

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For further information contact Leon Steenkamp, Head of Tax Insurance on +44 (0)20 7558 3994 or email leon_steenkamp@jltgroup.com