London houses owned overseas beat £1m tax

Hundreds of London's most expensive homes will escape the new five per cent stamp duty band on properties over £1 million announced in the Budget yesterday by Alistair Darling.

Tax experts believe around as many as a third of "trophy homes" in areas such as Belgravia, Knightsbridge, Kensington and The Bishop's Avenue in Hampstead are in the hands of offshore companies exempt from the tax.

When these houses change hands, the purchaser buys the shares in the offshore company rather than the title of the property, a legal manoeuvre that avoids having to pay any stamp duty or only half a per cent if — more rarely — it is a UK registered company.

The tactic is typically used for homes costing more than £5 million and is most often deployed when one wealthy foreigner sells to another.

The avoidance will cost the Treasury tens of millions of pounds more in lost revenue as the stamp duty bill on a £10 million home will now be £100,000 higher at £500,000.

Robert Guest, head of funds and financial services at law firm Rosenblatt, said: "A very, very substantial proportion of homes in prime central London are already owned by offshore companies."

In some of the most expensive streets in London such as Kensington Palace Gardens and Park Lane barely any properties are registered under the ownership of individuals. Parts of Mayfair have become "offshore ghettoes" where many homes are owned by untraceable foreigners.

Although HM Revenue & Customs has attempted to clamp down on some stamp duty avoidance schemes, once homes are in an offshore vehicle there is little tax authorities can do.

The structures used have changed over time to keep one step ahead of the taxman. A few years ago unit trusts based in Jersey or Guernsey were popular but this route has now been closed off. Most of the offshore companies used now are based in the British Virgin Islands although Panama and the Isle of Man are also popular.

The precise detail of the complex structures used are often so secret that purchasers are required to sign confidentiality agreements with the tax advisers who set them up. Typically they will pay a £10,000 fee upfront and then up to half the savings from not paying the stamp duty.

Alex Henderson, tax partner at accountants PWC, said: "Most people just wouldn't think of buying a property in that way, it is the kind of thing you do once you have got into Rich List territory. Once you get to that level you behave more like a quoted company than a normal person."