The FT reports this morning that:
At least £122bn of property in England and Wales is held through companies in offshore tax havens where ownership is difficult to trace, a Financial Times analysis of Land Registry data has found.
It adds:
Nearly two out of three of the 91,248 foreign-company owned properties in England and Wales are held via the British Virgin Islands and Channel Island structures. Just under two-thirds of the offshore-owned property by value is in Greater London, with 27 per cent in the City of Westminster. The Land Registry data do not allow a breakdown between residential and commercial property.
And also notes that:
The total value of offshore ownership of property is likely to be considerably higher than £122bn. Limitations on how the Land Registry holds the data mean the true picture is difficult to ascertain. More than a third of the data provided by the Land Registry do not contain a purchase price.
What the FT does not estimate is the cost of this. At least three taxes are potentially being avoided here. They are stamp duty, inheritance tax and capital gains tax. A fourth could be income tax if the properties are being let and are artificially loaded with debt to avoid payment, but I am going to ignore this last issue and look at the first three alone.
First, it is highly likely that there is 'churn' in the ownership of the portfolio of at least 91,000 properties to which this data refers. It would be very surprising if average ownership periods exceeded 10 years given the nature of the ownership, the fact that they have been put in tax haven ownership to avoid stamp duty on sale and the nature of this market. This activity has now gone on for some time. Because most of the properties are in greater London they are likely (but not certain) to be residential. Recent tax charges to discourage this activity does not have appeared to deter the offshore ownership pattern. The average property is worth at least £1.3 million, and probably rather more by now since this will be historic data. Assuming that prices have not inflated but that property is domestic a 5% stamp duty rate would be appropriate. If 9,100 properties changed hands a year that is at least £610 million of stamp duty avoided, and probably somewhat more due to price increases over time not allowed for in the calculation. If average prices have inflated since purchase as I note below when looking at capital gains tax it is likely the loss might be £900 million a year. I will use the lower estimate.
One of the attractions of holding property offshore as opposed to through a UK company (which is, of course, possible to avoid stamp duty on transfer) is that for the non-dom this avoids inheritance tax on an asset located in the UK. So how many of the owners of these properties die a year? I generally assume wealth is owned by older people and so that it is fair to assume 1/30 of all wealth might be subject to an inheritance tax charge in any year. In this group wealth may be more widely dispersed. In that case a rate of 1/40 of all property being subject to inheritance tax could be a more appropriate estimate. In that case about £3 billion of property may miss a charge at a rate of 40%. That is £1.2 billion avoided.
And then there is capital gain tax. If a ten year ownership period of residential property in London is assumed and this is prime central London housing then estate agents John D Wood suggest that London prices have almost exactly doubled from March 2004 to March 2014. That means that if property that cost £12.2 billion is sold each year on average the sale price could be double that. However, in reality, the purchase price of property held for ten years would, of course, on average be lower than the average of the sample as the whole for reason of that price increase too. On average the portfolio would have been bought in 2009, since when the gain has been about 50% of cost price. In that case, to be cautious, I will assume the average gain on the portfolio likely to be sold was 50% of declared average purchase price, or about £6.1 billion in this case.
Not all this sum would have been subject to CGT: some of these properties are subject to principal private residence relief, but some will not and some will be let. Assuming just one third are subject to CGT, and that seems fair given these two factors, that would leave gains avoided on a little over £2 billion that might have been payable at 28%. That is £510 million avoided.
This leaves £2.3 billion of tax avoided. No wonder in that case that there has been a surprising willingness amongst owners of these properties to pay the new 'envelope' tax charge introduced by George Osborne that has yielded much more than expected, with over £200 million expected to be paid this year. The avoidance activity still pays handsomely with a likely net return of more than £2 billion a year, at cost to the rest of us in the UK.
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Interesting that some might be subject to principal private residence relief – surely a loophole in itself in this situation considering the owner is either a non dom or a foreign company. Maybe a law could be passed to dis-allow this? Or am I misreading how the taxes and exemptions apply and to who?
The relief is geenrous
Why would you want the government to collect more tax? Money is more efficiently spent by anyone but government so why encourage inefficiency? Also why seek to inflict misery on these particular people? If only people of more modest means could avoid tax as well, then the economy would be getting somewhere.
I will leave others to reply
It’s the end of the day at work and it’s just too boring to be bothered with something so anti-social and facile
Wouldn’t most people like to be taxed less?
Most people would like free holidays to Barbados
Does your claim make any more sense?
PPR is not available for properties owned by companies. I think Richard was making the point that if these properties were owned direct by the individuals then PPR relief might be available, which means there is no CGT loss in these specific cases.
For some reason offshoring UK commercial investment property seems to be the acceptable face of tax avoidance.
Look at the proposals concerning offshored UK residential property and how some interested parties are concerned that these measures might impact on accepted practice.
Why not charge a land value tax for property held offshore at, say, 2% per annum to offset the losses you outline and to dissuade people from holding property this way. If 2% doesn’t dissuade people then up the rate to 3% and so on.
The thing is that most of the owners are presumably NOT UK voters and those that are could hardly afford to admit it.
The new envelope tax charge that Richard mentioned does exactly that. However, the charge is 0.2-0.5% per year, rather than 2-3%. So nobody is incentivised to un-envelop the properties.
Why not 2-3%? Probably because the anonymous owners are (a) influential party donors of the big parties, or (b) the only driver holding London property prices up, in which almost every MP is invested in a highly leveraged way.
Richard
Am not sure about some of your assumptions.
Firstly, whilst it is correct to say that SDLT would be avoided if properties were sold by way of share transfer, rather than by conveyance, in my not inconsiderable experience a huge percentage of clients are deterred from doing this because the original offshore companies have not been administered properly and so the buyers have no confidence that they are buying a clean company rather than buying a can of worms. Gut feeling is that around 75% of all potential sales by this route can rejected by the buyer.
Secondly, the CGT position is not as you paint it. CGT is not yet payable by non-residents of the UK from the sale of UK property, so it is factually incorrect to claim that using an offshore company avoids tax, as no tax would be payable even if the non-resident held the property directly. Yes, I am well aware that under the new ATED rules capital gains realised by an offshore company from sale of a UK residential property are now taxable, but the position re personally-owned properties has not yet changed. For your analysis to be meaningful, I think you need to differentiate between property held in offshore companies which are held by (a) UK-resident non-doms, and (b) non-resident individuals.
I do not know if your first claim is true
I do not agree with the second: the owners of these companies are usually resident here – hence the IHT avoidance too
For a UK domiciled and resident a UK company would have done
I can echo that it’s rare to find a buyer of property willing to buy the offshore company, largely because the buyer cannot be certain that they are not buying off balance sheet liabilities and other issues. The residence of the owners is irrelevant for inheritance tax (ignoring the 17/20 tax year deemed domicile rule) and a UK property is subject to inheritance tax if owned by an individual direct regardless of domicile and residence.
‘The owners of these properties are usually resident here’
How do you know? Do you have knowledge of the owners of these properties which your OP says is not available?
Proof is not the same as anecdotal evidence, but the latter is compelling
But not for an apologist for abuse, I know
I accept that its impossible to know how many deals to buy properties via share transfer fall through for the reasons I refer to. All I can telly you is that the majority of the potential ones which I have come across have fallen through.
Your CGT analysis does not stack up. If the non-Dom is resident in the UK then they would be entitled to PPR on any capital gain had they held it personally, so no tax is being avoided. Non-residents don’t pay CGT if held directly, and residents would get PPR exemption if held directly. Where is CGT being avoided?
I have allowed for PPR
Not every such property will enjoy it though
You are being unrealistic
Richard
Yes, a few very wealthy non-doms will also have a country mansion in the Home Counties along with their Belgravia apartment and so PPR would only apply to one of those properties. But in overall numbers terms that’s a tiny proportion of non-doms. Most only have one property in London. I’ve been working exclusively with non-doms for the past 35 years and my wife has been a leading London residential property estate agent for over 25 years so I think I can safely say that I know the non-Dom market rather well.
But you also entirely ignore the rental market
And I, candidly, think your sample wholly unrepresentative, by definition
Richard
No, I haven’t forgotten the rental market. Above around £5m of capital value the rental yields are very poor and so wealthy non-doms don’t generally “buy to let” above that level. If they are non-resident then CGT isn’t payable anyway.
I deal with around 15 major estate agents in my accountancy business. My knowledge of the market is very widespread. I know the prime London residential property market as well as anyone. How about you?
Tell me the name of your firm
Why the claims made behind a cloud of anonymity?
And the average price is well below £5m so your comment appears to have little relevance
Of course I’m not going to tell you the name of my firm. If I was going to do that then I would have posted in my full name. All I’m prepared to say is that my firm is based in North London.
So you ask me to dismiss my logical argument on the basis of your unsupported anecdote? And you wonder why I think you have a credibility problem?
So only those who post under their real names have any credibility?
Unless they agree with you of course.
To a very large degree, yes
Those who use single names etc usually actually also make clear to me who they are
You don’t in any way
So you do have no credibility
You really are an arrogant so and so.
No, not at all
The arrogant thing to do is pontificate behind a veil of anonymity and then expect that people believe you
I put myself up into the public arena and open myself to criticism. You haven’t even the courage to admit to who you are
That’s not just arrogance. It’s also cowardice
You overlook the rather important point that my clients request totally legitimate privacy, which of course the law permits. Therefore I do not broadcast who I am.
If it is requirement of this site that all posters must identify themselves then that’s fine. But that is not a requirement.
Read the comments policy
All anonymous comments are posted at my sole discretion
And I am opposed to opacity of exactly the sort you promote
It is the basis of abuse
Can I suggest that you change the name of your blog? It has nothing to do with Tax Research. It has all to do with a fairy tale of you pretending that the law is what you would like if to be, rather than what the law actually is.
That is your fantasy, but the fact is my research has had a significant impact on debate
If you don’t like it please feel free not to call again
As I’ve already remarked, residency is a bit of a red herring anyway – it’s domicile that will usually decide whether an individual will consider “enveloping” a UK property to avoid the potential inheritance tax that could arise from direct ownership. Many of the ultimate owners may not be tax resident in the UK, but they will often use the property when staying in London or let it out.
I thought that was clear from what I said
I suspect many will also be UK resident. There is an enormous incentive for non-doms to be so
You so often make assumptions and always your assumptions are that everyone is up to something.
Take your claim re HMRC statistics. There was a debate a little while ago about the statistics surrounding HMRC information on income and tax paid. Someone said that HMRC income stated total income received v tax paid and you said it didn’t. That the figures only showed taxable income. That made no sense to me so I asked HMRC to clarify and they did:
Dear Mr C,
When we refer to total income in our National Statistics we mean total income before allowances, deductions and reliefs…
For more information please see the link below to Personal Incomes Statistics. Table 3.5 provides information on incomes and deductions while tables 3.6 and 3.7 provide further breakdowns of total income and table 3.8 provides a further breakdown of deductions and reliefs.”
In other words you were wrong.
Why do people still believe what you say when what you claim as fact is so clearly shown as wrong?
I am familiar with that table
Now try to use it to show who uses what allowances and reliefs
In addition, please show where tax avoidance arrangements might feature – which was the point bing discussed
Or come to that interest offset against rental income
You are just a shrill who deliberately misleads
“I’ve been working exclusively with non-doms for the past 35 years and my wife has been a leading London residential property estate agent for over 25 years ”
and you sleep at nights?
Athos – D’Artagnan, this fellow came bothering us so we kicked him down the steps, he’d claimed to be your landlord.
D’Artagnan- He is my landlord!
Athos – then I’m glad we kicked him down the steps. I hate landlords!
Back in the day, when gallantry & wit counted for more than money.
Why on earth wouldn’t I sleep well at night?
If you can’t work out the answer I guess you can, which is also why you do
What? Advising non-doms how to run their tax affairs in full compliance with UK tax legislation? Why should that cause be not to sleep at night? You make it sound as though I’m rowing something wrong!
Every single Government of the past several decades has wanted wealthy non-doms to come here, and has legislated accordingly.
You are just obeying orders? Is that the only justification you can offer?
What do you mean “obeying orders”? I’d have my arse sued if I gave negligent advice and didn’t structure a non-dom’s tax affairs correctly. By “correctly”, I of course mean in accordance with the laws of the land, as reinforced by each successive Government.
Are you denying that the tax laws relating to non-doms are valid?
I can assure you I have structured non-doms affairs otherwise, with their consent, of course
You perpetuate what I consider an abuse on behalf of those who claim privilege by accident of birth. That is discrimination that should long ago have been consigned to history
Andrew
Don’t worry.
When it suited Richard to run his own company and pay himself dividends rather than salary and so avoid employers’ NIC he did so.
When it suits him to run an LLP which enables him to hide his declared income but at the same time criticise others for secrecy over their tax affairs he does so
He was just following the rules.
When people he doesn’t like follows the rules, he criticise them but he happily uses the rules when it suits him.
Don’t expect anything else.
I did not avoid NIC on dividends: they were below NI limits as I recall
I have not hidden my income in an LLP: I file full accounts, voluntarily
And you lie
All your future comments will be deleted
Richard
But it hasn’t been “consigned to history”. It is the law of the land, regardless of your desire to scrap it.
And I will continue to work to changes that law
Nothing will please me more than putting you out of business
Richard
No UK government will do anything to end the non-Dom regime. It is worth far too much to the country’s GDP.
I have been told my aims are impossible so often your comment encourages me enormously
If you live in Jersey or the IOM then there are very few employment prospects. The only one left is finance. THe EU killed of the potatoes. The UK killed of supplying the UK with cheap VAT free CD’s and books. Not everyone is wealthy enough to retire and live off pensions.
Change your governments then
Jason. Odd then,that unemployment in the IOM is only ca. 2-3% -I wonder what it is in Jersey? Dependence on a dodgy financial sector in the IOM has long been perceived,if unofficially, as a risky strategy,and that diversification into other areas,such as the shipping and aircraft registries for example,as a pattern for the IOMs future. I feel that the need for change to more legitimate means of supporting the IOM economy has been accepted,if grudgingly,by the Island -but somehow has not I feel,in Jersey. Maybe I`m wrong of course. Anyway,the IOM never had “potatoes”,or a “VAT free”wangle -but did have disease free beef exports,-and even now,has disease free bees! The IOM can`t rely on tourism either – definitely a rather niche market for the hardy!
All the islands have exported their unemployed to some degree
It’s a fact easily ignored
Net immigration also varies in line with demand
Richard
A while back we were discussing HMRC stats. I said that HMRC stats showed total income so tax paid was a fair indication that the reality was tax avoidance among the wealthy was not as prevalent as you constantly claim. You stated I was wrong as HMRC stats showed only taxable income. I knew that unless HMRC had changed its methods that you were wrong but I thought I’d check. So I emailed the HMRC statistics people who confirmed:
“Dear Mr C,
When we refer to total income in our National Statistics we mean total income before allowances, deductions and reliefs…”
In other words HMRC have confirmed that you don’t know what you are talking about when you discuss HMRC statistics.
The email address is spi.enquiries@hmrc.gsi.gov.uk if you want to check.
Might make people wonder what else you don’t know what you are talking about.
As ever you utterly miss the point
No one has disputed that HMRC publish what I think is table 3.5, but that does not show the information that was suggested to be missing in the previous discussion
First of all, it does not show the allowances and reliefs.
Secondly, it does not show who uses interest offset to reduce rental income.
Thirdly, it does not show who enters into schemes and arrangements that artificially reduce their income by claiming loss reliefs, which are of course a reduction in income and not an allowance
So, respectfully, as I would expect of you, you asked the wrong question, of course as a result secured the wrong answer, which you have however represented as suggesting I’m wrong. It does nothing of the sort. It just displays either, firstly, your lack of understanding or, secondly, your disingenuity. Let’s hope it is the first
This article and subsequent discussion just adds more support for the replacement of these “optional” taxes with an unavoidable land value tax. Time for the lib dems to promote one of their more sensible policies?
As sometimes happens you may be understating the problem. Can’t think why a lot of Portsmouth property is held by Channel Island individuals and companies………….
Is it?
Really?
What part of the market?