If you're ultra-rich or know of someone who is, there's a good chance they own a property in London. But what if we told you many billionaires don’t buy these properties in their own name? Instead, they use clever loopholes to keep their ownership hidden.

So, in today’s Finshots, we explore why they do it and how they pull it off.

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The Story 

Real estate has long been the favourite asset class of the wealthy. Globally, high-net-worth individuals, on average, allocate about 33% of their total assets to real estate. And it’s easy to see why. While stocks or bonds swing wildly with market conditions, real estate, whether residential or commercial, has proven to be a stable, tangible investment that typically appreciates over time.

And it’s not just local investments. Because the affluent often diversify their property portfolios globally. Some do it for prestige, others for smart diversification. And amongst global destinations, the UK, particularly London, has long been a favourite for the ultra-rich, including Indians. Why’s that, you ask?

For starters, foreign nationals can buy residential homes, commercial spaces, mansions, and warehouses in the UK and even rent them out. The country offers rock-solid property rights, meaning once you buy real estate, it’s yours, without the fear of sudden policy changes jeopardising ownership!

Then, there’s currency diversification. The British pound is one of the world's most stable currencies, offering Indian investors a hedge against rupee fluctuations. London’s status as a global financial hub also ensures a booming rental market with an ever-increasing population of students, professionals, and expats, and this ensures fairly decent rental yields. And with housing demand often outpacing supply, UK property values have held strong despite economic ups and downs.

No wonder Indian UHNIs (Ultra High Net-Worth Individuals) are drawn to UK real estate. Over 14% of their real estate investments are outside India. 

But here’s the catch. While UK real estate is a gold mine, it’s also a playground for the ultra-rich to dodge taxes. For them, big investments aren’t just about returns. They’re also about wealth protection, which sometimes means exploiting tax loopholes. And the UK real estate offers a particularly effective way to do that.

So, instead of buying properties directly, these UHNIs invest through offshore companies that legally own UK real estate. These companies are often established in tax havens like the British Virgin Islands, Guernsey, the Cayman Islands, etc. This setup helps them bypass taxes while also ensuring total anonymity.

Let’s break this down.

You might remember the Pandora papers. These were some of the most significant leaks that exposed the property investments made by the rich worldwide. The leak revealed how these offshore companies helped wealthy individuals and businesses set up shell companies in places with low or no taxes. 

The trick was simple.

Step 1: Set up a shell company in a tax haven.

Step 2: Buy UK property under the company’s name.

Step 3: Enjoy tax benefits while keeping ownership hidden.

Or, if you want to get even craftier – instead of buying property, just buy all the shares of an offshore company that already owns the property. This way, the buyer has control of all the company assets while staying invisible in public records. The buyers can either use the property for personal things or even rent it out, as they control the entire offshore company. Then, when they feel it’s time to sell the property, they simply transfer the ownership of all the company shares to the next buyer's name. 

So historically, these offshore companies were exempt from a number of taxes ranging from capital gains tax, stamp duty and inheritance tax as well. There was also the rental income tax advantage. If an individual owns a UK property and rents it out, they might be taxed at a steep 20% to 45%. But if an offshore company owns it, the rate drops to around 19%. And finally, privacy. When an overseas company buys property, only the company’s name appears in public records, keeping the actual owner’s identity under wraps.

When you put it all together, it’s easy to see why the UK property market has long remained a magnet for global wealth, mainly through these offshore companies based in tax havens.

And reading this might make you think that the UK government would be eager to close these loopholes. After all, they lose tax revenue, right? 

Here’s the thing, though. Even if foreigners invest directly or through offshore entities, the UK still makes money. The sale of prime properties (homes worth £5 million or more, where the global rich invest) is a substantial source of revenue for the UK exchequer, from stamp duty to capital gains tax.

So, while they might lose some revenue from offshore setups, they still earn a fortune overall. And that might be one reason why the UK law allows offshore companies to own property there.

Now, coming back to Indian investors in UK properties. 

A few days back, the Economic Times reported that the Enforcement Directorate (ED) has been questioning wealthy Indian individuals about their overseas stock investments disclosed in IT returns. 

So basically, these affluent Indians have bought shares of offshore companies (involved only in holding real estate in the UK with no other business). And under India’s Foreign Exchange Management Act (FEMA), resident Indians can remit up to $250,000 per year to purchase properties abroad directly. However, the twist here is that buying shares in offshore companies that hold just real estate and no other business is considered a violation. The government’s main concerns are money laundering and unregulated capital outflows, which might weaken the Indian rupee.

So yes, that’s the scoop on this so far.

Meanwhile, many of these benefits given to offshore firms in the UK have been reduced over the years. Capital gains tax exemption was removed in 2019, stamp duty savings have been limited since 2014, and inheritance tax exemptions were abolished in 2017. It also introduced Beneficial Ownership (BO) disclosure rules, requiring offshore companies to reveal their true owners. However, the very structure of tax havens that these offshore companies are based in helps these wealthy people to dodge taxes and launder money.

The tussle here is that India has stricter rules, but the UK seems to have lax regulations (allowing offshore companies to buy properties).

Although the UK is increasing transparency, unless it outright bans offshore entities from owning property altogether or closes the offshore share transfer loophole, wealthy individuals will continue to exploit these structures to minimise taxes.

This raises another question ― Should India tweak its foreign investment rules to align with global standards, as the UK is doing?

The risk? It could fuel inequality, as the wealthy might be able to hide their investments and launder their money worldwide while paying a lower share of taxes.

But for now, until global tax laws tighten and tax havens are cracked down upon, the rich will find a way around the system. 

Until then…

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