With the outbreak of the Panama Papers scandal, it came as little surprise to anyone that a large number of London properties were held by offshore companies, the ultimate beneficiaries of which were a closely guarded secret. However, the papers do show us just how extensive some of this offshoring has been and also to what degree rich foreign nationals have been using London property as a safe haven for their wealth. The question which is on everyone’s mind now, is what does this mean for property prices in London? And with the Government already starting to crack down heavily on tax avoidance, what would this mean for international investors looking to optimise their investments?
This April over 11 million documents were leaked from the vaults and firewalls of the global offshore services firm Mossack Fonseca. These papers landed in the hands of the International Consortium of Investigative Journalists (ICIJ) who have gotten a deep insight into the operations of the firm and the structures it uses on behalf of wealthy individuals all over the world.
By in large tax avoidance or “tax optimisation”, as it is often referred to, is legal and Mossack Fonseca and those mentioned in the leaked papers deny any wrongdoing. However, such scandals tend to anger people and put pressure on Governments’ to crack down these loopholes for the ultra rich. Simply put it reminds everyone that no only are the rich richer than the rest, but they are also uniquely positioned to profit from ultra low tax rates while the general population continues to suffer high tax rates to in part tend to austerity measures which have loomed for nearly a decade.
A number of very high profiled names have been disclosed in the Panama Papers, which include Sheikh Khalifa bin Zayed Al Nahyan, ruler of the UAE, whose tops the list of London property tycoons with a property empire worth over £1.2bn. But others include the ex-prime minister of Iraq, the president of the Nigerian senate and also Soulieman Marouf, Syria president Bashar al-Assad’s close London based consultant.
In the UK today, there are some 23,000 buildings with ownership coming from the British Virgin Islands, a further 2,000 stemming from Panama which is only the 8th most favoured tax haven, behind the bellwethers such as Guernsey, Luxembourg and the Isle of Man. These vehicles have contributed to central London property prices nearly doubling since the beginning of the financial crisis at the end of 2007 as investors were lured in by a cheap Sterling, strong returns and a stable government.
The main reasons wealthy international investors use offshore structures in the UK is because it is cheaper to buy and sell properties through trusts and companies as these are not subject to Capital Gains Tax (CGT) which is currently 20% for property in the UK. But also with the recent increases in stamp duty throughout the UK, owners of offshore companies can transfer the ownership of their properties via a share sale, thus avoiding stamp duty altogether. Finally, offshore trusts are not subject to Inheritance Tax and can therefore be passed down from generation to generation without incurring tax. Finally, another great benefit of offshore vehicles is the privacy they once came with.
But the privacy of offshore investors and the tax benefits they have enjoyed is increasingly being scrutinised by governments, especially in the UK where from June 2016, a public register of the ultimate beneficiaries of such companies is being set up to help improve transparency and also crack down on money laundering. Again the question which remains what would this mean for overseas investors and London Property going forward? Only time will tell.