Measures to stamp out illicit money being laundered via UK real estate could, unless crafted tightly, hurt the country's property sector, a law firm says.
Government proposals to create a publicly available register of beneficial owners of entities holding UK property could put foreigners off buying and selling such real estate, a jolt that could hit at exactly the point when Brexit talks are causing uncertainty, lawyers warn.
The proposals, says law firm Boodle Hatfield, could deter overseas entities from buying and selling property in the UK. There is already a public register of beneficial ownership, but the new recommendation for a completely separate register would affect companies incorporated abroad that own, or seek to own, UK property.
“The idea has been around for a while and came to prominence last year during the Global Anti-Corruption summit. The rationale is to ensure the UK property market is open and transparent and to deter criminal activity, and that is clearly laudable. However, with Brexit negotiations shortly to start, any measures that may discourage investment in the UK needs to be viewed with caution,” Sara Maccallum, senior partner and head of tax at Boodle Hatfield, said.
The government kicked off a consultation launched on 5 April and recommend a register to be kept by Companies House operating on similar lines to the existing "people with significant control" register for UK companies, and requiring similar disclosures. In June 2016 the government introduced a central, publicly accessible, register of beneficial ownership, known as “people with significant control register”.
However, the government says further action is needed because of the use of property by overseas entities to launder money.
A letter from Margot James, a junior minister with the title of Parliamentary Under-Secretary of State and Minister for Small Business, Consumers and Corporate Responsibility, said: “The UK property market should be seen as fair, transparent and clean in order to attract the right investors and owners. Honest business should not fear that they are supporting criminal enterprise when investing in UK property. A higher level of transparency will boost investor confidence.”
“These requirements will also extend to entities bidding for government contracts. This will ensure that we, as government, know who we are dealing with, and that we meet the standards we expect of others,” her letter continued.
“This register will be the first of its kind in the world. That is good news for the UK, enhancing our already strong reputation as an honest and trusted place to do business. But it also means we need to proceed with care. Our open economy benefits greatly from foreign companies looking to do business in Britain. We need to make sure the new requirements are workable and proportionate, such that the UK remains an attractive place for foreign investment. This call for evidence will help us test and refine our proposals to strike the right balance,” James’ letter added.
The idea of putting beneficial ownership details into the public domain, which was floated several years ago by former Prime Minister David Cameron’s government, and reiterated last year, is controversial because of fears that legitimate client privacy and safety could be put at risk. It has also been argued (see here) that public registers may not even be the best way to stamp out illicit money.
“The plans propose that overseas entities would not be able to buy or sell property in the UK unless they have provided the requisite information. A note would be placed on the title at the Land Registry to that effect that the registered owner will be unable to sell, lease or mortgage the property where it is not complying with the new law,” Boodle Hatfield’s Maccallum said.
One of the proposals is that the consultation proposes that current owners would have a year from the introduction of the register to either disclose or sell the properties, Boodle Hatfield said. Entities incorporated in other countries with equivalent publicly available registers will be exempt from registering in the UK. It is also proposed that criminal penalties may be introduced for non-compliance.
“There are a number of practical difficulties with the proposals which would need to be addressed, such as offering reassurances to banks who lend the funds for property transactions, ensuring there are adequate protections for beneficial owners to ensure their safety is not compromised, and to ensure the proposals could work across the whole UK,” Maccallum said.
A concern, the law firm said, is that such a move comes after the UK’s property market has been jolted by tougher tax treatment of high-value real estate in the UK, and the ending of permanent non-domiciled status.
“It is not clear how these proposed changes would affect the prime residential market, but given recent trends it is quite possible that it will again knock this market,” Saskia Arthur, head of residential property, Boodle Hatfield, said.
“It should also be noted that many prime residential property owners have extracted properties from corporate vehicles following the recent removal of the IHT benefits of holding property through offshore structures and increases in the annual tax on enveloped dwellings. Further new purchasers are increasingly less likely to use a corporate vehicle to hold residential property, so its impact may not be that severe, but only time will tell,” Arthur added.
The government says the scale of potential illegal money being used via UK property is significant. In its consultation paper, it said that between 2004 - 2014, more than £180 million worth of property in the UK has been investigated as suspected proceeds of corruption. In January 2016, the National Crime Agency reported the conviction of a money launderer who had used offshore companies to launder £12 million stolen from Commerzbank through council properties in London.