UK ‘more attractive’ for illicit Russian cash after property tax climbdown

Expensive homes in London, where wealthy overseas investors have long invested their cash. Photo: Matt Crossick/ EMPICS Entertainment
Expensive homes in London, where wealthy overseas investors have long invested their cash. Photo: Matt Crossick/ EMPICS Entertainment

The UK government has been accused of undermining efforts to tackle illicit Russian cashflows into Britain after it watered down a planned tax on overseas buyers.

An extra stamp duty charge for non-residents comes into force in England and Northern Ireland next April.

The government approved a 2% ‘surcharge’ in little-noticed documents published without fanfare on Tuesday (21 July), the same day as MPs’ heavily critical report on Russia.

But the Conservatives had promised a 3% levy as recently as November – and the low-key reduction of the planned rate has faced little scrutiny.

A financial crime lawyer warned in the wake of the Russia report that reducing the rate risked making Britain “more attractive” for money laundering.

Little-noticed watering down of party pledge

In the run-up to the election last year, the now-chancellor Rishi Sunak warned overseas purchases “inflate prices.” A Conservative press release said this made it harder for residents to get on the ladder, and made clear: “We will introduce a stamp duty land tax surcharge levied at 3%.”

The party highlighted two studies at the time on the extent and impact of such purchases, including by Russian buyers in London. A more recent report found 55% of prime London properties sold to overseas buyers in the second half of last year.

Proportion of London property bought by overseas buyers. Chart: Hamptons International
Proportion of London property bought by overseas buyers. Chart: Hamptons International

But the Conservatives’ November election manifesto conspicuously failed to mention how much the levy would be. By the time of the budget in March, the proposed amount had been reduced to 2%.

Now public documents online show the government defending a 2% charge, saying it “strikes the right balance” between helping resident buyers and having an “open and dynamic economy that welcomes inwards investment.”

But the climbdown has attracted little media or political attention. Westminster was focused on the Russia report itself when the latest Treasury documents were published without fanfare this week, while debate at the time of the budget was dominated by bigger announcements and COVID-19.

The ‘London laundromat’ for illicit cash

Speaking exclusively to Yahoo Finance UK, one lawyer said the lower levy could detract from efforts to discourage illicit cash flows into UK property from Russia or other “high-risk” countries.

Kyle Phillips, a director in corporate and financial crime at law firm Fieldfisher, said: “The government seem to be having their cake and eating it.

“On the one hand they’re increasing legislation which is trying to prevent the UK being used as a vehicle for money laundering, but on the other they’re reducing the [planned] levy for overseas buyers from high-risk jurisdictions investing in the UK.”

READ MORE: Russia report warns of threat from Putin-linked elites in the UK

The issue has been thrown into the spotlight by a parliamentary committee’s report on UK government’s handling of security threats from Russia. It said UK governments had for years been “welcoming oligarchs with open arms,” drawn to the UK’s property market, limited regulation and an excellent legal system.

The report claimed Britain’s property market formed part of a “London ‘laundromat’” which helped oligarchs to recycle illicit cash, aided by “enablers’ including estate agents, lawyers and accountants.

“People from Russia, the Middle East and other high-risk jurisdictions were using the UK as a vehicle to launder money as it was easy to do so,” said Phillips.

“Obviously there’s been an increase in legislation trying to tackle this, like expanding the reach of money laundering regulations to estate agents, but this [lower levy] is going to make it more attractive for them to re-enter the market.”

The government introduced new powers called unexplained wealth orders (UWOs) in 2017, but the report by MPs said it was “highly probable” oligarchs and their lawyers would find ways to circumvent such crackdown efforts.

READ MORE: Stamp duty cuts ‘huge bung’ to second home-owners

Phillips suggested some buyers using illicit cash could seek to avoid new regulations by paying others to buy property for them or setting up UK shell companies.

A Treasury spokesperson said: “The UK welcomes legitimate, ethical and honest investment from around the globe.

“The 2% surcharge strikes the right balance between making it easier for people to buy their first home and keeping our economy attractive enough for inward investment.”

The government also acknowledged in its official response to MPs’ report that having a large, open economy left Britain more exposed to money laundering risks.

It said driving dirty money out of the UK was “a priority,” and said law enforcement capacity to tackle illicit finance had been ramped up. It highlighted new powers to seize criminals’ money, the launch of the National Economic Crime Centre, and said Britain had “led the world” by introducing registers of beneficial company ownership.

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