Ahead of speaking at this week's Investment Property Forum event in London, Ocorian's Simon Burgess, Head of Global Alternative Investments, discusses the future of real estate investment held offshore.
The UK's proposed changes next year to tax gains made by non-residents on UK immovable property has got the real estate investment community thinking. Whereas currently many UK resident property investors pay capital gains tax, if you are non-resident in the UK and you own property in the UK, you are not required to pay capital gains tax. From next April, however, this is planned to change, and everyone will have to pay capital gains regardless of where you are resident.
No doubt some investors will transfer their property investments to UK resident holding structures. However, I suspect it's unlikely that we'll see a seismic shift in the number of properties currently held in overseas entities being transferred to the UK - not least because there are so many. It has been reported that there are nearly 100,000 property titles held by non-resident entities registered at the Land Registry. Transferring these will be costly, especially if third party debt is involved, but there are also other things to think about. The coming winds of change have plenty of investors considering their positions.
Yet there are other factors you should consider - apart from tax treatment - before making that final choice to either keep the entity in its current non-resident structure or to bring it into the UK. Here's just eight of them.
Consistent tax codes
This is about certainty. In mature jurisdictions around the world, such as Jersey and Luxembourg, tax codes are consistent and predictable, which investors, of course, love. Investors are particularly interested in certainty, especially in real estate investment transactions - they want reasonable certainty for net return. When considering the appropriate location for their investment entity, investors will naturally consider the history of tax codes in the jurisdiction.
Fund products and regulatory specialism
Jersey particularly is known internationally as a centre of excellence for real estate investment structuring. Over many years it has built a body of expertise, able to handle even the most complex of property transactions, including structuring and financing them. The regulatory regime also offers a range of fund products that make it as easy as possible for funds to be set up for real estate investing, and quickly. This type of regulatory specialism - where mature jurisdictions are highly regarded international finance centres - gives investors comfort that they are investing through a well-regulated jurisdiction.
Stable legislation and regulations
As an extension to the previous point, legislative stability is key. Jersey is built on English Common Law, and many countries are familiar with this. Similarly, Luxembourg's codified approach is clear and transparent. This means you can rely on the legal framework to give you protection that may not be so readily available in other jurisdictions. The need for regulatory and legal certainty in real estate investing cannot be overstated: those jurisdictions that have had regulations in place for many years, and have become specialists in the real estate investing, will always be favoured. They have built up a sophisticated suite of regulations to accommodate investors and investment managers from around the world.
Asset, service and technology specialism
Because of the large number of real estate investments being structured through locations like Luxembourg and Jersey, the industry in each has built up a pool of very highly expert specialists, which translates to superior levels of client service in running fund structures. In more recent years weâ€™ve seen the use of smarter technology providing solutions to funds to produce information in an ever more granular form, delivering more frequently and more accurately than ever before, and specialist jurisdictions have invested heavily in these technologies - straight-through processing and data aggregation supports better quality and faster investment decision-making.
Robust governance standards
The approach to governance is of critical importance to people who invest through companies, partnerships and trusts, in addition to those who actually sit on the boards of relevant entities. Investors benefit in the knowledge that the law in specialist jurisdictions has given those board directors responsibility for their actions to a greater degree than ever before. This gives investors greater comfort in trusting their assets in hands of guardians who will protect their interests. Knowing the full force of the law is behind them helps investors choose the appropriate jurisdiction for their structuring.
This becomes important particularly around areas of transparency - which, of course, the alternative investment industry is moving heavily towards through global regulation. For example, investors with different tax positions can be brought together through jurisdictions like Jersey enabling them to work together more efficiently. They pay tax where they are tax resident and in the countries they invest in, without being faced with cross-border tax complexities and bureaucracy. Details of the source of funds and wealth are carefully checked and this information is shared with relevant authorities and governments to ensure tax is paid where it is due.
We should not run scared of recognising the importance of commercial privacy in property transactions and also other business transactions - but it's also vital that the industry does all it can to ensure privacy is not allowed to be used to give criminals vehicles for their illegal activities. The UK's drive to openness and transparency is admirable in its efforts to fight financial crime and corruption. However, it is clear to everyone working in financial services that having the ability to know who holds the title to a particular property or the ability to download financial statements at a click via Companies House does little to stop money laundering, while it can have negative commercial implications to the running of lawful businesses.
Of course, if you own through a Jersey or Luxembourg company, partnership or trust, then none of those features apply as accounts aren't available to anyone apart from relevant authorities and governments. The average Joe or your direct competitor can't download your company accounts and look at what's going on to their competitive advantage. That level of commercial privacy is important to some people, not because they're doing anything wrong but because they just want to be commercially private.
Country risk mitigation
If you have assets held in one country that might be a high-risk environment, such as a country on the verge of war or in the grip of terrorism, then having assets held in a stable jurisdiction like the Channel Islands or Luxembourg is an important risk mitigant. It goes back to the stable legislation point, having comfort that the rule of law in those countries is robust.
Simon Burgess MRICS ChDir (Chartered Surveyor and Chartered Director) has more than 30 years real estate experience and specialises in the establishment and operation of cross-border funds. Hear him speak about the Future of Real Estate Investment with the Investment Property Forum on 3 May.