UK property will not be a safe haven for money laundering in the near future if the government presses ahead with plans to create a register of ownership by offshore investors, but perhaps a more robust government position on taxing empty property would encourage the buy-to-leave investors to rethink their plans, argues Sara White, editor of Accountancy Daily
As money laundering through property remains a significant concern, a joint select committee review of the draft legislation for a brand new register of the overseas owners of property sheds light on abuse of the property market. Part of the government’s wider clampdown on dubious overseas owners using London and the south east, particularly, to launder money through property, the new register is designed to improve transparency, much in the way the register of persons with significant control has attempted to improve transparency around company ownership.
For years questions have been raised about the ownership of property with thousands of luxury apartments springing up all over London, many left empty and bought off plan in Hong Kong, Shanghai, Moscow, and so forth. It is not unusual for luxury apartment blocks to be almost exclusively offshore owned; just check the dark residential blocks with only the odd light to know that the majority of these apartments are empty for most of the year. Many never make their way onto the rental market.
A Transparency International report in 2017 assessed 14 new landmark London developments, worth at least £1.6bn. It found four in 10 of the homes in these developments were been sold to investors from high corruption risk countries or those hiding behind anonymous companies. Less than a quarter had been bought by buyers based in the UK.
Between 2004 and 2015, £180m of UK property was subject to criminal investigation as suspected proceeds of corruption, and this may be just the tip of the iceberg. In 2017, 160 properties worth over £4bn were identified as being purchased by high corruption-risk individuals, and 86,000 properties in England and Wales have been identified as owned by companies incorporated in secrecy jurisdictions.
Property company Savills estimated that 32% of buyers in the high-end prime London market were international, while a Knight Frank report suggested that 49% of sales worth over £1m were to foreign nationals. When it comes to new build, the numbers are stark, with overseas buyers accounting for 36% of sales in prime London boroughs, revealed a report into overseas investors in new build properties, commissioned by the Mayor of London in 2017.
While it is hard to quantify the amount of unoccupied property, analysis of 2011 census statistics by University of York found that unoccupied rates were 25.5% in the City of London, 19% in Westminster and 14.4% in Kensington and Chelsea. Further analysis showed that in the £5m plus property bracket under-occupancy rates are as high as 64%, compared with 27% for properties valued between £500,000 and £1m. This illustrates the buy-to-leave phenomenon, in other words invest and leave vacant, a better wealth generator than banks or bonds.
In practice, the draft Registration of Overseas Entities Bill, set for parliamentary debate this autumn, would mean that any overseas individual or entity buying a property in the UK would have to disclose their identity and register their beneficial ownership information at Companies House. Whether this goes down to identifying the source of their funds is another question and there appear to be no safeguards in place to actually verify the data. Equally, trusts will be exempt from the register, which would create an immediate loophole as the property could be purchased through an offshore trust, effectively circumnavigating the rules.
But there will be a number of exemptions to registration, which the government has yet to clarify. The plan is to introduce the rules in 2021, following implementation of the 5th Anti Money Laundering Directive, EU legislation which the UK will bring into effect by 2020, regardless of the UK’s Brexit status, and this will supplement unexplained wealth orders, introduced as part of the Criminal Finances Act 2017, and suspicious activity reporting requirements.
In 2016, then Chancellor George Osborne tried to dampen the purchase of multiple properties with the introduction of the second property, higher rate of stamp duty land tax (SDLT), which at the time was seen as a lacklustre attempt to tackle the buy-to-let market. But a 3% premium is hardly a deterrent for offshore investors looking to purchase multiple properties.
Likewise, the annual tax on enveloped dwellings (ATED), a fixed annual charge for properties valued at over £500,000 made through envelope schemes, has been a bit of a failure. However, ATED has not been a significant revenue generator since it was first announced in 2012. Latest figures showed it raised £143m in 2017/18, primarily from central London properties, down 18% on the previous year. The latest move on overseas property investors is a 28% capital gains tax charge on residential sales of UK property, perhaps providing a disincentive to investment.
Despite concerns about the UK’s post Brexit future and potential economic turbulence, UK property prices continue to rise, albeit not with the intensity of earlier years. The next move by government should be a more aggressive position on taxing empty property.
Vacant property tax
Perhaps an easier way to stop market abuse would be to charge a 1% annual tax on the value of the purchase price of the property for any home that is left vacant for more than a year. This could increase on a sliding scale over a five-year period to 5% of the purchase price. The threat of a higher tax bill, presumably even for absent landlords, could act as a deterrent. This will not necessarily deal with the problem of creating a more affordable property market, but it would be a signal of intent.
At local level, there has been some progress with the imposition of higher council tax rates for empty property. If a property remains unoccupied and unfurnished for two years or more, council tax increases to 150%. Replicating this approach to taxing empty property could be a start on a long road to dealing with the UK’s critical housing shortage, if only to deter investor-driven property accumulation and stop the attrition of local communities as demand for local services is skewed.
Whether the property register will be a real deterrent to stop money laundering through the UK property market will have to be tested in the courts eventually, but at least it is a start and it will make it more difficult for unscrupulous investors to make a mockery of the UK property market.
Sara White is editor of Accountancy Daily