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Patrick's Property Politics

London Property Market. Less a Laundromat - more an Airing-Cupboard

Monday 14th March 2022

By Patrick Bullick

I find myself so horrified about the situation in Ukraine that I have largely turned off the radio news - to which I am usually addicted.

It really is grim beyond belief and the Ukrainians very brave.

For fear of escalating things to WW III there is not much the UK can actually do about Putin’s aggression, so our politicians and the BBC are obsessing about punishing Russian ‘Oligarchs’.

As usual, they miss the point - Germany, other major European economies, the US and to some degree the UK, fund the Kremlin to the tune of $500 million per day through having bound themselves to Russian oil & gas supplies. This is what is funding Putin’s war.

Sanctioning the Oligarchs is a side show. Punishing them does little to hurt Putin let alone stop him.

London is often accused of being a huge laundromat for Russian funds. I would aim that accusation directly at the Swiss Banks - with Credit Suisse seemingly stuck on full spin.

Actually, London property is more like, that very English concept, the airing cupboard. A place of warmth, where the cleaned and pressed sheets can peacefully nestle until they are redistributed to their next home.

Whilst there is no doubt Russian kleptocrats have parked ill-gotten gains in London property, many others have too. Nigerian businessmen, Indonesian illegal logging magnates, unsavoury middle-eastern fixers, Albanian gangsters. They are all here.

The problem for the London property market is these funds are now firmly stuck in the airing cupboard.

Two key and largely unrecognised technical points cause this blockage -

1. HMRC have recently changed the tax rules so that non-resident sellers, be they individual or special purpose companies, are obliged to log with HMRC the sale of any UK property, regardless of whether any tax is payable.

2. Separately, under OECD rules, there are now something in the order of 100 countries (including Russia, Nigeria, India, Indonesia & China) which share, liberally and automatically, tax information arising from property sales (and other taxable transactions) in their own jurisdictions.

The result is - those who brought dirty or illicit money out of their own jurisdictions and placed it into the London property market, cannot now sell without triggering an auto-alert to their own tax authorities. Uncomfortable for most. Deadly for some!

Net result is there are many beautifully cleaned and ironed properties stuck in the London Airing Cupboard.

Whilst these properties cannot be sold for fear of triggering an alert back home, they can and are used as collateral for raising funds for other investments, as that does not trigger a tax alert back home. Again, the banks have been extra-ordinarily lax in their due diligence when lending against these properties.

Parliament is legislating to boost the ability to chase down and freeze Russian’s funds.

There are a number of long overdue measures such as having a proper register of Ultimate Beneficial Owners (UBO’s) at companies house.

Unexplained Wealth Orders (UWO’s) have been in play in the UK since January 2018 - and in the mouths of politicians in the last few days. However, very few have been issued, let alone successfully applied. The National Crime Agency (NCA) has botched their use on a couple of occasions and, perhaps as a consequence, been slow to issue others.

The new legislation is supposed to boost the ability of the authorities to successfully push through UWO’s. We will see.

In my experience the NCA are just like the Met Police. Spending all their time and resource whining about not having enough time or resource to solve crime. A self-fulfilling nonsense. Regardless, the NCA probably do need to be better funded if we are to genuinely chase down these crooked characters.

The threat of more enforceable UWO’s might drive the crooks to try to sell their properties. The latest seems to be that they have six months after the legislation has passed to register the beneficial ownership, which gives them a window.  

Assuming, they are able to pass the Anti-Money Laundering tests of agents and solicitors then they may be able to shift their ill-gotten gains. This is a big assumption, as most reputable agents have stringent client checks and will have to withdraw from acting for anyone who does not pass them. They may also feel obliged to submit a Suspicious Activity Report which would really put the seller in the soup.

If the NCA do issue UWO’s on the properties of those they suspect, those assets too will be frozen.

My instinct is most of this dirty money is now firmly stuck in the airing cupboard.

The Central London Property market is destined to stay sclerotic and dysfunctional.

In my fantasy world I have great ideas about how the Govt/HMRC/NCA could free up those ‘frozen’ properties and increase fluidity in the market.

They are fabulously draconian!

I would require NCA to issue Unexplained Wealth Orders on all non-resident owners. If within six months they could not explain where the wealth came from, the property in question would be put up for sale.

The proceeds would then be kept in an escrow account for a further year.

If the non-resident owner still couldn’t explain the original source of the wealth, in a thoroughly convincing fashion, the monies would be put into a fund for building new social housing.

All those properties in the airing cupboard would be turfed out of their cosy hibernation and put to better use, creating a more normal and fluid market.

I know - a fantasy. The politicians don’t have the b…s

Please send me your ideas.

I will edit and air them.

PB

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