This is piece of Out-Law’s series of news and insights from Pinsent Masons experts on the impact of the UK’s EU referendum. Watch our video on the issues facing businesses and sign up to receive our ‘What next?’ checklist.

The globe continues to pivot and real estate investment will persist regardless of the nature of the UK’s future relationship with the EU, but deal evaluation and structures may now require to grab into account potential Brexit risks relating to tax, and other Brexit-related factors.

Transactional taxes

VAT is the most relevant tax to consider, as VAT derives from the EU’s Principle VAT Directive. However, the UK system of VAT is established by UK legislation deriving from the 1994 VAT Act. This means that ceasing to be a member of the EU will not automatically revoke the UK’s VAT system.

It is difficult to see why the government would desire to replace the revenues derived from VAT with a radically varied consumption tax, and the consequences of creating a materially varied tax on price added would be huge for business. At least in the medium term, the government is likely to retain VAT through the VAT Act – as well as the related practice and decades of case law decided with reference to the Act, which are so important to the practical operation of the tax.

The most important aspects of VAT in the real estate context are every likely to remain; namely, the option to tax, VAT grouping and zero rating. Even if changes are made in due course, there is likely to be some sort of ‘grandfathering’ to avoid the huge commercial disruption that could arise if any of these regimes was to be radically changed.

Outside the constraints of the EU directive, there may be more flexibility to see at zero rating in residential developments – particularly the VAT costs which impact on residential development and refurbishment for letting. However, the government may not be in a position to construct changes which risk lower revenues.

Any changes to VAT would in any case be very unlikely to come into effect infrontof delayed 2018; given the two-year process for withdrawal from the EU set out in Article 50 of the Treaty on the Functioning of the EU (TFEU) and the potential disruption to business when combined with non-tax changes occurring as a result of an EU exit. Transactions with VAT supplies within this period are therefore very unlikely to be affected. It would, however, be worth reviewing contractual provisions to ensure that any replacement for VAT will be passed on in the same way as VAT for any transactions or leases where VAT supplies will be made following this date.

Other transactional taxes

The other main transactional taxes are not influenced by EU legislation so far as they apply to real estate investment transactions, so it is unlikely that deal costs or cashflows will be affected. These taxes include corporation tax, or earnings tax for non-UK resident corporate investors; stamp duty land tax (SDLT) in England, Wales and Northern Ireland, land and buildings transaction tax (LBTT) for land in Scotland; and deductions beneath the Construction Industry Scheme (CIS) regime.

Investment structures

The usual structures for property investment and development do not rely on positions derived from EU law, so there is generally no reason why a preferred investment structure should alter solely for tax reasons as a result of the UK’s exit from the EU.

However, if a Luxembourg or EU-domiciled fund or investment vehicle is used which relies on the UK provisions based on the EU Interest and Royalties Directive to eliminate withholding on interest payments subject to UK tax, it would be appropriate to review the structure to see whether relief from withholding is available beneath a bilateral treaty. If no treaty relief is available, it may be necessary to restructure the financing of the UK vehicle to address withholding tax, assuming that the UK would cease to be a party to the EU Interest and Royalties Directive and would repeal the related UK legislation.

Other issues

It is unlikely that any EU discussions will alter the UK’s direction on the major proposed tax changes which will impact on real estate. Initiatives driven by the OECD’s base erosion and profit shifting (BEPS) project, including the restriction on interest deductions (Action 4), are silent likely to be introduced in their current proposed shape as there is no reason for the UK government to alter its stance on its participation in the OECD-led initiative.

However, it is not beyond doubt that the government may defer the introduction of the changes if it perceives a general threat to the level of overseas investment into the UK and BEPS is seen as a factor creating tax uncertainty. The government may also be more willing to address  situations where there is evidence that the BEPS interest proposals could own a negative effect on investment, including in real estate.

Post-referendum, the government announced that proposals in the consultation document on taxation of developing and trading UK land will be introduced at committee stage of the 2016 Finance Bill. This makes sense, given the avoidance context of these proposals.

John Christian is a real estate tax expert at Pinsent Masons, the law firm behind Out-Law.com.