The United Kingdom’s uncodified approach in the way it treats foreign sovereigns for tax purposes has long stood apart. For decades, foreign states — including many from the UAE and wider GCC — have relied on a distinctive, common-law doctrine of sovereign immunity from direct taxation. This does not sit in statute, and is not created by treaty, but instead flows from centuries of judicial reasoning and the principle that one sovereign does not tax another.

HMRC’s practice has been to assess each sovereign entity on a case-by-case basis, reviewing its legal status, its proximity to the foreign State, and the nature of the investment activity. If a sovereign wealth fund or reserve-management authority can demonstrate that it is an integral organ of the State — not a commercially oriented, separate corporate entity — HMRC generally accept that it should be immune from UK direct taxes on passive investment income and gains.

This landscape has changed subtly yet importantly over the past three years, and this week, as the UK Chancellor of the Exchequer prepares to present her Autumn Budget on 26 November, sovereign investors should be asking a timely question: how safe are these boundaries?

So far, there is no public indication that sovereign immunity will feature explicitly in the upcoming Budget. But the themes shaping this fiscal cycle — property taxation, non-resident investment, commercial neutrality, and the search for new revenue — place sovereign immunity squarely within the broader policy considerations.

A doctrine under review, even if not yet rewritten

The most significant shift came in July 2022, when HM Treasury published without fanfare a consultation that reopened the debate on whether the UK’s sovereign immunity regime remained fit for purpose. The consultation proposed two major reforms.

The first was procedural: the Government suggested codifying sovereign immunity into statute, replacing the opaque, common-law approach with a formal legislative framework. The second was substantive, and potentially transformative. The Treasury asked whether certain types of income that are currently exempt should no longer be protected, specifically:

• UK real estate income and gains, including through investment in UK REITs, and
• trading or commercial income generally, whether earned directly or through corporate vehicles.

This would have marked the biggest reshaping of sovereign immunity in modern British tax history.

Ultimately, after strong feedback from sovereigns and market participants, the Conservative Government of the day stepped back from the proposal. In the Spring Budget 2023, it confirmed that it would not proceed with the changes, leaving the piecemeal common-law regime intact.

Yet the consultation changed the tone of the conversation. For the first time, the UK publicly acknowledged the tension between sovereign tax exemption and the scale of sovereign participation in commercial property, infrastructure, and private markets. In so doing, the question of sovereign taxation was not resolved — only deferred.

The tax position today: broad protection, but not across all taxes

Under the regime as it stands today, qualifying sovereigns remain exempt from UK direct taxes, including income tax, corporation tax, and capital gains tax. This protection typically extends to:

• interest, dividends, and portfolio returns;
• gains on shares, bonds, fund interests, and private equity holdings (including through qualifying asset holding companies (QAHCs); and
• in most cases, rental income and disposal gains from UK real estate, provided the investment activity is passive.

But the immunity generally has three broad limitations (while exceptions may exist), which take on heightened significance in today’s policy environment:

1. It does not extend to indirect taxes. Sovereigns continue to pay the following transaction taxes in full:

1.  Value Added Tax (VAT), 
2. stamp duty and stamp duty reserve tax (SDRT) on acquisitions of UK shares, and
3. stamp duty land tax (SDLT) on acquisitions of UK real estate, including the non-resident 2% surcharge..

2. It does not protect all commercial or trading activities. Operating businesses (hotels, retail, logistics, development platforms, or any business that functions like a standard corporate) fall outside the immunity unless structured separately as fully taxable vehicles.
3. It does not automatically apply to separate legal entities. A sovereign wealth fund may be exempt; a company it owns or a pension fund it manages on behalf of its employees may not. The exemption attaches to the sovereign person and its ‘organs’, not the entire group automatically.

The area that remains most sensitive — and most politically exposed — is investment in UK property, including real estate and infrastructure. Sovereigns have historically enjoyed full exemption on both rental income and disposal gains, even as 2019 changes have meant non-resident private investors face income tax, corporation tax and capital gains tax. It is precisely this asymmetry that the UK highlighted in 2022 as a point of policy tension.

As the 26 November Budget approaches, what should sovereigns pay attention to?

No official announcement has suggested that the UK will use this Budget to reform sovereign immunity. However, the government is said to be looking at a ‘smorgasbord’ approach to tax raising; the fiscal backdrop has created a moment where the sovereign exemption regime could — at least indirectly — come into sharper focus.

Several themes expected to shape the Budget align closely with issues relevant to sovereign investors:

1. Property taxation is firmly back in political debate.

Budget speculation suggests adjustments to property-related taxes, reforms to SDLT, changes in bands, or additional surcharges for overseas purchasers. Any movement in real estate taxation inevitably raises the question: how will sovereigns be impacted by such changes?

2. Pressure for revenue is intensifying.

Political and financial constraints have combined to create a need for ‘stealth’ measures. In a tax environment that is tightening, exemptions of any kind — including sovereign ones — attract more attention. Would the electorate care if sovereigns were taxed more? Would they prefer it to any tax rises upon them? 

3. Competitive neutrality remains a live policy concern.

The 2022 consultation framed sovereign immunity through the lens of fairness: should sovereigns continue to have privilege in markets where they directly compete with UK pension funds and private capital? This question has not disappeared.

In short, even if sovereign immunity is not rewritten this week, sovereigns may be caught up in broader changes and further reforms might be signalled. 

Why this matters now

For sovereigns, the timing matters because sovereign immunity operates in two temporal dimensions: the regime as it exists today, and the regime as it could evolve. The Budget does not need to legislate change for sovereign investors to be directly affected. If the Treasury signals further reviews, revisits competitive neutrality concerns, or announces new consultations on property taxation, it will influence how sovereigns model future UK exposure.

The takeaway? Sovereigns should recognise that the environment around the doctrine is shifting. Stability today does not guarantee permanence tomorrow. The sovereign investors best positioned for the future will be those who treat immunity not as an unchanging entitlement but as a strategic factor — one that must be monitored, justified, and structured for resilience.