But the proposal has been heavily criticised for its vague definitions, or “loopholes” as the committee referred to them.
The provisional bill was published in July 2018, following a promise by the government in 2016 pledging to introduce a transparent register of foreign individuals and companies that own properties in the UK.
Under the still-to-be-introduced rules, overseas entities holding UK properties will have to register with Companies House, the UK business register, and identify any relevant beneficial owners.
But the joint committee was concerned that trusts do not seem to feature under the definition of ‘overseas entities’.
Investors could be scared away
“Increasing transparency of ownership in the UK property market will no doubt be a positive in combating criminal activity,” Simon Malkiel, partner and head of trusts, tax and estate planning at Howard Kennedy, told International Adviser.
“However, whether it will achieve its aim remains to be seen. There are legitimate reasons a foreign investor may wish to protect their privacy and the introduction of this register might make the UK an unattractive forum for this investment if they are no longer able to do so.
“Those who already have property in the UK can no longer have peaceful enjoyment guaranteed, as they will need to relinquish their right to privacy in order to deal with any land registry transactions relating to their proprietorship interest.
“Aside from the privacy issues, the proposal also increases the administrative costs of buying and holding investment property in the UK.”
A matter of privacy
Additionally, Sakhjit Randhawa, partner at law firm Charles Russell Speechlys, told IA that people who own properties through offshore companies or trusts do so to protect their, and their loved ones’, safety.
“Following recent inheritance tax changes, it is now better for foreign buyers to own in their personal names and not use offshore vehicles at all.
“However, for a minority of foreign buyers, using offshore companies to purchase UK property helps retain privacy for security reasons. Crucially, this is not tax driven; the tax paid remains the same as if the individual owned it. The name of the beneficial owner is always given to HM Revenue and Customs so that tax can be paid by that beneficial owner.
“Many foreign royal families, celebrities and major business owners fear for their security and privacy, including the security and privacy of their immediate family members. For these clients, that anonymity of ownership offers them security and protection against kidnapping, violence and press intrusion, whilst allowing them to pay their taxes as any law-abiding owner must.
“It is therefore unclear what the government is trying to achieve here, given that the necessary tax authorities are aware of beneficial owners.”
“The legislation is well drafted, but there are still some loopholes in the draft bill which, if unaddressed, could jeopardise the effectiveness of this important piece of legislation,” said Lord Faulks, chairman of the committee.
“In the current political climate, anti-money laundering may not seem an immediate priority. But the evidence we took shows there’s a huge problem, and it’s not going away. Time is of the essence: the government must get on with improving this bill and making it law.”
The joint committee’s criticism stems from the fact that trusts are not defined as “overseas entities” and, as a result, they would not need to register and disclose beneficial ownership.
The review said: “The draft bill does not require trusts to register. Unless a trust is a ‘legal person’ under its national law, it cannot be described as an entity.
“Indeed, many of the draft bill’s provisions would be inapposite for trusts. For example, the draft bill defines beneficial ownership in terms of shareholdings, voting rights, power to appoint to boards, and ‘control’.
“Only the last is relevant to trusts.”
Trusts would not be publicly disclosed
“The land registries will have no ability to restrict transactions by non-registered trusts,” the report added.
“Someone wishing to launder money could establish a trust, allowing the trustees to hold property on their behalf. Although the trust would usually be recorded by the Trust Registration Service, this would not be public information.
“Moreover, although the ultimate owner would be caught, since they would exercise ‘significant influence or control’ over the trustees, it is likely that this information would never be made known to the register.”
It is clear that more work needs to be done, Malkiel told IA, echoing the joint committee’s concerns.
“The intention behind the bill is admirable but the bill itself is hardly perfect and these increased security measures need to be balanced against the risk of losing investment to other jurisdictions.
“The joint committee does not criticise the intention behind the bill – only its execution.”