Wealthy buyers exploit stamp duty loophole

Published 01st Mar 2011

With a 5% rate set to come in, some are using an offshore vehicle to reduce their liability almost to zero


Buyers of some of Britain's most expensive homes may avoid paying the new 5% rate of stamp duty on £1m-plus properties thanks to a tax loophole allowing houses and flats to be registered in the names of companies rather than individuals.

The rise – from 4% to 5% – comes into effect in April and means that duty on a home costing, say, £1.5m will rise from £60,000 to £75,000. Duty on a £10m estate rises from £400,000 to £500,000. Some buyers are trying to rush purchases through before the increase is implemented, but the richest buyers have discovered a legal route that almost avoids the tax altogether.

This is done by setting up an offshore company – typically registered in a tax haven such as the British Virgin Islands or Panama – specifically to buy a property. The company may cost tens of thousands to set up, but this route is already taken by rich overseas purchasers of property in the UK, and by wealthy Britons based abroad.

The company buys the home in its name, initially paying the full stamp duty. But when the owner decides to sell the property on, he sells shares in the company rather than the property itself. The transaction is not logged with the Land Registry, enabling the new buyer to take over the property stamp-duty-free: the company shares attract stamp duty at 0.5%, or sometimes less, instead of the 5% on conventional sales. Such buyers may also pay much less inheritance and capital gains tax on the house.

"The seller could explain to the buyer the huge saving on stamp duty from designating shares rather than property, and they could agree to split that saving," says Hamilton Forrest, a tax expert at Rosenblatt Solicitors. "It's entirely legal and could be a substantial sum for each of them."

The Candy Brothers – whose new development in London, One Hyde Park, includes flats priced from £6.5m to £140m – are reported to have written to potential buyers explaining the benefits of "offshore vehicles".

Estate agents in central London, where many flats and houses have seven-figure price tags, say that about 20% to 25% of deals are now done through these offshore vehicles. Agents in the most desirable areas such as Mayfair, Kensington and Holland Park say well over half of their clients are from overseas, the majority purchasing in this way.

Now agents in Cheshire and on the south coast say they, too, are seeing buyers who use these companies. Specialist lenders, dealing only in mortgages of £1m or more, say they will arrange loans to offshore firms as well as to private individuals.

But anyone buying a home this way runs long-term risks, say experts. "You don't know if the company whose shares you buy has other liabilities as well as the property," says Hamilton Forrest. "Debtors and problems could come out of the woodwork."

"Offshore purchasing is perfect for an overseas investor who buys an expensive apartment, lets it out and never lives in it. But for anyone else, it's a ticking time-bomb," says David Kilshaw of tax consultancy KPMG.

"What if Revenue & Customs choose to charge tax on any appreciation on the property? What if there's a change in the law about the tax status of these offshore vehicles, as there has been for overseas non-doms living in Britain? This could be a complete nightmare."

Prices of top-end homes have been largely unaffected by the downturn, as their buyers are likely to be less vulnerable to mortgage restrictions and wider economic worries.

Now it seems that they may have tax benefits, too – if they think the risk is worth it.

Source: ' Guardian '

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