The UK government is considering changes to the tax treatment of foreign sovereign wealth funds, a move that could generate over £2.6 billion by 2032 but may also risk deterring significant investment in the country, according to tax experts. The Treasury announced plans to "modernise" how these funds are taxed, particularly targeting returns from directly held UK real estate, with proposals potentially taking effect from 2029.

Currently, sovereign wealth funds benefit from a broad exemption from UK direct taxes, a status the government now intends to revise. Officials say these changes would bring the UK more in line with the tax treatment found in other countries, while maintaining a "globally competitive offer for foreign sovereign investment."

Sovereign wealth funds from nations including South Korea, Norway, Singapore, and Abu Dhabi have been notable investors in the UK’s build-to-rent housing sector in recent years. However, some industry observers expressed concerns that increased taxation might dampen this activity. One global investor described the prospect as potentially "another nail in the coffin for [the] UK build-to-rent [sector]."

The government's shift marks a departure from earlier policy decisions; following a 2023 consultation, the Conservative administration chose not to pursue changes affecting sovereign wealth funds at that time. The renewed focus has drawn caution from tax professionals who emphasize the need to balance revenue generation with the risk of discouraging further foreign investment.

Roger Holman, private client partner at WTS UK, highlighted the potential economic impact: “Given the scale of investment foreign sovereigns make into the UK, the government risks shooting itself in the foot by driving away such investment with taxing UK trading and property income and gains going forward.” Similarly, Euan Sutherland, European head of tax at FTI, noted that the changes "could influence where some of the world’s largest investors ... deploy their capital."

The Treasury has launched a consultation process to gather input on the proposed reforms ahead of any formal implementation. As sovereign wealth funds remain key players in the UK real estate and broader investment landscape, the upcoming policy decisions will be closely monitored by international investors and industry stakeholders alike.