As scrutiny over the beneficial ownership of assets and investments, most notably UK real estate, continues to increase, many property-owning families are caught between a raft of new transparency regulations and the legitimate desire to preserve both privacy and reputation.
In the sixth and final blog in our series reflecting on themes from our Generation Game report and roundtable event, Matthew Garrod and Matt Bosworth examine how real estate and other transactions are likely to be affected by this changing regulatory landscape, and what the considerations will be for families when choosing to use structures such as trusts and offshore companies to manage their portfolios.
When we sat down back in September 2021 to reflect on the issues raised by our Generation Game report – in particular the changing nature of family dynamics and their emerging priorities, with acronyms from ESG to NFTs – we could hardly have predicted how far the world was about to change.
Russia’s war in Ukraine, and the resulting global sanctions regime, has prompted a significant ratcheting up of scrutiny of almost any transaction for fear that, somewhere down the line, there could be an entity or individual deemed to be immoral, illegal or just unpalatable who is the one turning a profit.
To take a recent example, when agents CBRE announced that it would be marketing the iconic Liver Building for only the second time in its history, it seemed, on the face of it, something of a coup as well as a potentially fascinating investment prospect given the heritage of the property and a stellar base of corporate tenants. Following some journalistic digging, however, it became apparent that the ultimate owner of the building was an individual who, while not sanctioned themselves had fairly widely known ties to a person who was/is subject to the sanctions regime.
Similar such real estate connections have also been identified with various private residential properties, with the common factor being the use of overseas entities, including trusts and holding companies, to own the assets and facilitate transactions.
It remains to be seen of course whether these disclosures will affect the ultimate sale of the Liver Building, or the decisions of its tenants. But the overall lesson is plain. The corporate veil is being pierced – both by the media, and by a growing spider's web of regulations which will have real repercussions for wealthy families and family offices owning assets, not least property, within structures.
The primacy of privacy
The widely held view, particularly in the UK, is that such families use corporate vehicles as well as entities such as trusts to hold their assets and investments almost exclusively to avoid tax. This, for the vast majority, is a gross simplification. While tax is a consideration, it is rarely if ever the prime motivator. Indeed, the establishment and management of a trust, for example, could in some cases be a more expensive option than any tax saving which might be made, while the growing body of international law and regulatory powers on cross-border tax cooperation and information sharing is negating much of the tax advantage, as well as any historic evasion loopholes that might have been used by the less scrupulous in the past.
The reality is, therefore, that settling assets into a structure brings wider and more nuanced benefits.
More often than not the primary concern is privacy – sometimes with respect to the outside world, and sometimes, depending on the family dynamics and its own relationship faults and foibles, to say nothing of full-blown disputes, with respect to other family members. Privacy of course becomes a particularly acute issue in situations where, say, the beneficiaries of a trust are minors whose personal safety could be put at risk should their status be revealed.
As we discussed in our Generation Game report, this concern for privacy is being increasingly challenged by the opposing forces of regulation-driven transparency and a concern, particularly among the next generation, regarding social responsibility and the reputational damage that can be caused both personally and to potential business ventures if structures and corporate relationships are deemed, especially by the media, to be ‘murky’.
Evolving regulatory landscape
The tide of pro-transparency regulation has risen in recent months, not least with the new Economic Crime Act, which attained Royal Assent in March 2022. But the waves have been rippling for some time.
For example the British Virgin Islands has committed to introduce a public register of beneficial ownership for companies incorporated in the jurisdiction. This is set to take effect next year.
Meanwhile in the UK, under the 5th Money Laundering Directive, new rules came into force last year (September 2021) expanding the requirements to register under the Trust Registration Service to include any UK-based trusts and some overseas trusts, regardless of their tax status. This includes express trusts established to acquire UK land or property.
While the Trust Registration Service is not a public register, the new Register of Overseas Entities which the Economic Crime Act has introduced, is.
The Register, originally announced by David Cameron back in 2016, is intended to provide law enforcement bodies more information to inform money laundering investigations and, explicitly to “require anonymous foreign owners of UK property to reveal their real identity.” The rules will apply to any overseas entity (an entity governed by the law of a country outside of the UK) and persons with significant control/beneficial owners of such an entity, which owned UK property on 28 February 2022 or acquired an interest in a UK property after this date.
Real estate in family portfolios
The impact of these requirements will be widely felt. The UK, and especially London, is among the top global destinations for international real estate investment.
Research from the Centre for Public Data has shown that almost a quarter of a million property titles across England and Wales are registered to individuals with an overseas address, with the numbers doubling since 2010. Meanwhile almost 100,000 properties are registered to overseas companies. In the case of individuals it is striking that 75% of the properties are registered to owners with addresses in just 20 countries. These are mainly the Crown Dependencies and British Overseas Territories, as well as South East Asia and the Middle East.
More widely, according to UBS’ most recent Global Family Office Report, real estate makes up around 13% of family office portfolios, while more than 20% of respondents said that real estate investments would increase to 2025. Much of this is likely to consist of overseas investments, including in the UK, with Knight Frank’s Wealth Report 2022 finding that around a third of UHNW property portfolios are held overseas.
It is important to stress, of course, that using an offshore structure to hold assets is, in itself, certainly not against the law and should not be viewed as such. Doing so can be an entirely appropriate and responsible decision for the management and preservation of assets.
But the implications of relying on such structures will continue to factor both as a regulatory and a reputational consideration for families – including the decisions families themselves may take with regard to accepting investment into their own business(es) from outside sources.
Likewise media and other stakeholders are increasingly likely to view with suspicion those who make the decision to locate their assets in particular jurisdictions, with some viewed as being more reputable than others. When entering into corporate transactions, or even lease agreements, opposite parties, especially those who have strict protocols around ESG criteria and wider brand values, may be mindful of being tarred by the ‘offshore’ brush or, worse, subject to fines if the involvement of offshore entities in a deal is not appropriately disclosed.
Amid these reputational considerations one thing does remain clear. The UK, and in particular London – not least as a result of the security and stability provided by our legal and regulatory system – continues to hold its well-earned reputation as one of the most attractive real estate investment destinations on the world stage.
Investors rightly see London as a safe location. While market and rent conditions might fluctuate, value is nearly always retained or enhanced.
While the growing body of transparency regulations will create new challenges for some families to navigate, UK real estate retains its lustre. The use of suitable structures – including to plan for the transfer of assets between the generations, to mitigate familial strife and to preserve the personal security of loved ones and other beneficiaries – does, and should, remain a fundamental part of family wealth planning.
The Generation Game: The Great Wealth Transfer and the Outlook for Families in 2021 and Beyond” is available to read here. For more information or advice about any of these issues, contact our Family Office team.