What has changed?
The UK government has said foreign companies and their beneficial owners will have to join a public register in order to own or buy residential and commercial property.
Announcing the proposal, Prime Minister David Cameron said: “No foreign company will be able to buy UK property or bid for central government contracts without joining this register.”
The proposals, which will also cover existing owners of property, will go out to consultation later this year and the government aims to introduce the register in 2019.
There are no details as to how the measure will be implemented or the penalties for non-compliance.
Beneficial owners or persons with “significant control” over a company have been defined by the government as:
– Directly or indirectly holding more than 25% of the shares in the company
– Directly or indirectly holding over 25% of the voting rights in the company
– Directly or indirectly holding the right to appoint the majority of the board of directors
– Having the right to or actually exercising significant influence or control over the company
– Exercising significant influence or control over a trust or firm that itself meets the control conditions, where that trust or firm is not a legal person
Knight Frank estimates that less than 2% of residential property in London is owned by offshore companies.
Why have the rules changed?
The drive by the UK government for greater transparency for offshore companies comes against the background of growing global scrutiny on cross-border money flows from organisations including the OECD and IMF.
Offshore companies have recently been the focus of particular scrutiny following the so-called ‘Panama Papers’ data leak in April.
Why have offshore companies been used to buy property?
There are two key reasons for owning properties through an offshore company.
First, it has been tax-efficient.
While there are a complex series of factors that influence how offshore companies and trusts are structured, the key reason to buy residential property in this way is the current exemption from 40% inheritance tax.
However, the government has signaled this exemption is likely to end next year.
It follows a series of other regulatory changes that make it more expensive to buy and hold residential property for offshore companies, including widening the scope of ATED (Annual Tax on Enveloped Dwellings) to properties worth more than £500,000.
Consequently, even before the announcement of a public register of beneficial owners, it had become less attractive to buy and hold property through offshore structures.
The second reason offshore structures have been used is to preserve anonymity, which can be the result of privacy or security concerns, typically among buyers from geo-politically unstable regions of the world.
However, this represents a much smaller number of individuals and a cost-benefit analysis is far more likely to explain a buyer’s decision to use an offshore company.
What is likely to happen next?
Two things.
First, offshore trusts and companies will reassess their property holdings following the announcement of the beneficial ownership register, and some may decide to sell due to the cumulative effect of the the previous changes.
However, there is unlikely to be a wave of properties coming to the market. Offshore structures typically own other assets beyond property and evaluating how to manage a portfolio will be based on a series of complex and interlocking factors that may lead to a disposal or mean it is advantageous for the structure to remain in place.
Furthermore, any decisions are likely to be delayed until EU referendum in June and, more importantly, many will wait until there is more clarity surrounding the removal next year of the inheritance tax exemption, the last major advantage for offshore companies buying property.
The second thing that is likely to happen is that more individuals will buy property in their own name, a trend that is being replicated around the world as the new global norm as international bodies like the OECD demand higher levels of transparency.
As a result, a beneficial ownership register is unlikely to have a material impact on demand for prime London property. The number of transactions that exclusively hinge on anonymity is likely to be small.
However, this change should be seen in the context of wider global initiatives and tax changes that will make owning prime property in key global hubs more complex and expensive.
