By Mark Healey, private client director at VG
The UK, specifically London, as a real estate investment destination has always benefited from the depth of its market and undoubted gateway status. However, the UK Government has made the ownership of UK property through overseas entities less and less attractive in recent years with several changes, namely additional taxes on using overseas entities and bringing the UK property assets themselves into the realms of UK taxation to be more in line with those taxes paid by a UK resident.
Such changes in the system of taxation have certainly caused high net worth individuals to consider their positions and restructuring or de enveloping has historically occurred however many remain satisfied with their structures and are content with paying the additional taxes while retaining the ability to remain anonymous.
Despite all of these historical changes, we and our partners have expected that the UK will be a top target as easing Covid-19 restrictions unleash pent-up demand with some partners predicting a record year for global cross-border real estate investment activity. Further our clients’ interest in UK trophy, commercial and residential assets has not abated; in fact, this year already we’ve supported several clients undertaking several landmark deals.
According to PWC, the UK is now the most favoured destination in Europe for combined investment and development prospects for the year ahead. But have reactions resulting from recent geo-political tensions changed this?
Putin the brakes on?
Following the London anti-Corruption Summit in May 2016, it was announced that to clamp down on foreign criminals using UK property to launder money the UK Government, it would introduce sweeping disclosure requirements in the form of a Register of Overseas Entities (‘Register’). Since 2018 when the draft bill was published, progress in enacting this law had been rather slow, however Russia’s invasion of Ukraine and the imposition of sanctions on persons linked to Putin’s regime has provided fresh impetus to ensure the legislation is now enacted.
On passing of the law, the Register will apply retrospectively to property bought since January 1999 in England and Wales and require entities owning UK property to register and provide details of their beneficial owners to Companies House before such an entity can be registered as the legal owner of the property. Beneficial owners’ details to be disclosed will include their name, date of birth and nationality and usual residential address, however we understand that the addresses of non-primary residences and date of birth will not be made publicly available.
Non-compliance with the law will result in restrictions on registering or disposing of Land, criminal sanctions including fines of up to £500 per day or a prison sentence of up to five years. Existing owners will have 18 months to comply, and once entities are registered an annual statement will be required thereafter.
Financial privacy vs. legitimate law enforcement
The sheer magnitude of publicly available personal data for certain HNW individuals (from social media, companies house, HM Land Registry, business websites, news and internet) will provide a very detailed profile of an individual, which can leave HNWs vulnerable to threats such as blackmail, fraud, or simply loss arising from the sale of their private or personal data.
Whilst registers of beneficial ownership are not novel, the proposed UK register differs from other jurisdictions such as Jersey which, whilst requiring the same information, makes the information only accessible to law enforcement and is therefore of less concern from a privacy standpoint to beneficial owners.
Loss of privacy: the death knell for the use of overseas entities to purchase UK property?
While the signs certainly look that way, we consider that it might be too early to tell, and we need to wait for the detail. For example, the definition of beneficial owners mirrors the definition of Persons with Significant Control which already applies to reporting for UK Companies and has a 25% threshold. As such could anonymity remain available going forward if ownership of the overseas entity is somehow split five ways or more or will that just be impractical?
In addition, the legislation seems to exclude an overseas trust which could be an oversight given its intended aim. However, should this indeed be the case then going forward there might be opportunities to use such a trust for UK property ownership where again anonymity, for the legitimate purpose of privacy and security, could prevail.
We fully expect the proposed bill to be passed in the very near future. As such those responsible for managing overseas entities should be working with their clients to ensure there is an awareness of the changes and to agree how best to proceed in each scenario.