The principle of sovereign immunity - that one sovereign state should not seek to impose its law on another sovereign state - is an established part of international law says Jonathan Legg, partner at international law firm Mishcon de Reya in a briefing note on 28 July. 

Historically, sovereign immunity has meant that the UK has not sought to tax income and gains arising from UK real estate investments held by other countries.

Sovereign wealth funds are major global players (with one study stating that assets under management by such funds were more than US$15 trillion) and the UK has attracted significant investment over the years. 

The Government's view is that the UK is currently too generous compared to other countries when applying sovereign immunity, and has launched a consultation paper on changing the rules.

The US, Canada and Australia, for instance, do not exempt property income arising in their territories from tax, but do exempt interest and dividend income. Other countries, such as Germany and Japan do not give exemption to property income interest nor dividend income.

The Government is also conscious that it brought most offshore investors in UK property within the UK tax net in 2019/20, and so the continued tax exemption for offshore sovereign wealth funds looks somewhat incongruous.

The Government plans to move the UK into what it considers is the mainstream of international practice, by taxing sovereign wealth funds on their income and gains relating to UK real estate but continuing with the exemption for interest and dividend income (following the approaches of the US, Canada and Australia).

The proposed start date for any change is 1 April 2024 and, importantly, the Government accepts that assets can be "rebased" at that point (so that only gains arising from 1 April 2024 will be subject to tax on capital gains tax) - meaning the charge will not be retrospective.

Will this make the UK less competitive? It certainly will decrease the value of returns for sovereign wealth funds if they are now paying tax. However, the reality is that the non-tax attractions of the UK for real estate investment remain. The Exchequer is therefore relying on sovereign wealth funds continuing to see the UK as an attractive place for long term real estate investment overall.

By Jonathan Legg, partner at international law firm Mishcon de Reya.