Super prime time
22 February 2010
The economic downturn has provided opportunities for foreign investors to buy into the UK property market using offshore vehicles, say Mark Summers and Philip Beckerlegge
While the UK property market has seen a significant decline in activity and prices over the past 18 months, the weakness in the market and the value of the pound has led to non-UK-resident purchasers bucking the trend. Foreign investors are showing an increased interest in a market that they now perceive offers good buying opportunities.
This trend is most marked in the ’super prime’ (residential properties exceeding £10m in value) end of the UK property market, particularly in London, where the world’s ultra-high-net-worth individuals continue to invest. For these individuals a trophy London home remains a ’must have’, and there is currently a clear shortage of suitable properties in the best areas of London (Mayfair, Belgravia, Kensington & Chelsea, Knightsbridge, St John’s Wood and Hampstead).
In many cases the capacity of these individuals to purchase UK properties was barely affected by the economic crisis: they had no need for bank finance to purchase or, to the extent that they felt it desirable to finance the purchases, they were the one group of borrowers to which banks were prepared to make funds available.
In recent research, estate agents Knight Frank note that, while London super prime prices fell by 20 per cent around the time of Lehman Brothers’ collapse, the reduction in real terms to international buyers was 30-45 per cent, depending upon their base currency. Non-resident purchasers have therefore seen opportunities to invest, which has perhaps produced the first signs of green shoots in the market.
This interest has started to spread from super prime homes to wider investment in residential and commercial properties, where yields have been depressed. This has also given rise to a trend of non-residents co-investing with friends, family and business associates in order to exploit the opportunities.
From a tax perspective, the UK property market remains almost uniquely attractive to non-resident investors in major developed countries. Not only is it possible to structure in a straightforward manner through offshore vehicles to avoid Inheritance Tax, but gains are also entirely tax-free, regardless of which structure is used. Few other jurisdictions can boast both of these attributes. The only tax that usually has to be paid is Stamp Duty Land Tax (SDLT), typically at 4 per cent, although sometimes that too can be sidestepped with care.
Keep it simple
For the sole non-resident investor purchasing a single property, a simple offshore company limited by shares will suffice. A combination of cost, speed, simplicity and confidentiality means that the British Virgin Islands (BVI) is perhaps the most frequently used jurisdiction, although Panama and the Isle of Man remain popular. Recent reform of company law in the Channel Islands has seen companies there make a return.
Where there is co-investment by non-residents, an offshore limited partnership holding individual properties through separate offshore companies has become a common choice. Tax treaty provisions between the UK and the Channel Islands or the Isle of Man have traditionally meant that limited partnerships in these jurisdictions were used, particularly where a development element was involved and investors attempted to avoid being taxed on a trade being carried on in the UK.
Partnership structures also continue to offer a few opportunities for avoiding SDLT, although many of these have been blocked recently. Co-investors also have to be careful that offshore limited partnerships or unit trust structures do not fall foul of local financial services regulations. However, regimes such as the ’expert fund’ regime in Jersey can offer attractive options for minimal regulation.
In relation to SDLT, many ideas or schemes involve the use of offshore companies and it is very easy for the unwary non-resident investor to be sucked into significant financial costs and legal complications for the sake of a short-term tax saving.
The most frequently used ’carrot’ is that the property is already owned through an offshore company and SDLT can be avoided simply by purchasing the shares. However, the purchaser is acquiring not only the property, but also the company with all of its historic liabilities, so they are often more than doubling their due diligence costs. They are also acquiring the seller’s base cost of the property within the company for capital gains purposes. Although non-residents are exempt from tax in the UK, this may be an issue in the purchaser’s home jurisdiction. Even if it is not a problem for the investor, the only purchasers likely to take on the problem on resale are other non-residents, which reduces significantly the pool of potential purchasers.
Both issues can in theory be dealt with, but it usually requires a complex corporate restructuring involving the liquidation of the existing vehicle. Even then the seller is likely to demand a cut of the potential SDLT savings (typically 30-50 per cent) - so beware Greeks bearing gifts.
Mark Summers is an international tax and trusts partner and Philip Beckerlegge is a private client property partner at Speechly Bircham