Only 1 in 300 property purchases by overseas cash buyers are triggering red flags with the National Crime Agency (NCA) in a wakeup call for the UK property market, anti-money laundering (AML) specialists Fortytwo Data have warned.
In the US, a similar jurisdiction to the UK, 5% of home sales are to overseas buyers and 44% of them pay cash according to latest figures1.
Transposing this trend data onto the UK property market means 26,400 homes are sold each year to overseas cash buyers in Britain, where 1.2m property transactions were the subject of only 355 Suspicious Activity Reports (SARs) in the year to March 20162.
SARs are red flags sent by financial institutions, law firms and estate agents to the National Crime Agency (NCA) when they detect suspicious activity. It comes against a backdrop of widespread fears that foreign criminals have been using the UK property market to store their ill-gotten gains.
Fortytwo Data’s knowledge of the anti-money laundering sector suggests direct overseas transactions are responsible for around a quarter of SARs raised in the UK. This means only 0.33% of cash purchases by overseas buyers are triggering alerts - 1 in every 300 sales.
Estate agents’ reporting responsibilities have been strengthened by the latest EU money laundering directive (4AMLD).
The NCA’s director of the economic crime command, Donald Toon, has offered insights in the past on the scale of the problem, revealing how he believes “the London property market has been skewed by laundered money”3.
The number of SARs submitted by estate agents to the NCA climbed dramatically in 2015/16, rising 98.3% in only a year albeit from a very low base. It was the highest rise of any sector, which suggests lack of awareness and training in the past has been a problem.
The second highest rise came in the gaming industry which saw the number of SARs submitted climb 52.4% to account for 0.37% (1,431) of the 381,882 SARs received by the NCA that year.
Julian Dixon, CEO of Fortytwo Data, said: “There is no doubt that 355 SARs generated by all estate agents is a tiny number. That figure seems to be on the right trajectory but the industry still has a long way to go.
“The residential property market is a golden opportunity for criminals, who are able to take advantage of a sector that, in the past, has not been subject to such stringent money laundering requirements as financial institutions.
“Bricks and mortar is as attractive as ever to organised crime. It’s an ideal way to deposit large sums of cash in a single transaction, allowing them to blend in with the thousands of legitimate cash buyers who purchase property each year.”
The US is a comparable jurisdiction to the UK. The US property market, like Britain’s, is a safe haven for illicit funds because of the rule of law, relatively stable markets and high prices which make money laundering more efficient. Their regulatory regimes are based on identical enforcement frameworks.
(Source: Fortytwo Data)
Leary & Partners quantity surveyor and tax law expert, Kaylene Arkcoll forecasts a bleaker future for investors in Australia’s residential property -- particularly strata units.
The budget has stripped investors buying second-hand residential properties of a major tax deduction.
Pre-budget there was intense speculation about limits on negative gearing. Instead, Ms Arkcoll explains, in an unexpected move the Government has restricted one of the standard forms of residential investment deduction.
"Purchasers of second-hand residential investment units have lost their ability to claim depreciation on plant and equipment which is part of the property at the time of purchase.
The Government will limit plant and equipment depreciation deductions to outlays actually incurred by investors. There is no lead-time with these changes -- they apply to all contracts entered after 7.30 pm (AEST) on 9th May 2017."
The change is forecast to save AUD $260 million dollars over the next four years.
Being able to claim depreciation on investment properties is a powerful driver for most investors. For second-hand residential properties the budget roadblocks this avenue of investment joy for everyone except investors who carry out renovations or replacements. In Ms Arkcoll's opinion, "Older building stock may now be less desirable".
Details of the policy are still limited but Ms Arkcoll says: "It appears that:
- The intent of the policy is to restrict depreciation claims to items purchased and installed in the property by the claiming taxpayer.
- Depreciation deductions will remain available for items that are part of a new property purchased from a developer, although this is not explicitly stated in the budget papers.
- Subsequent purchasers of the property will no longer be able to claim depreciation based on the second-hand value of the plant and equipment.
- Taxpayers already depreciating plant and equipment can continue to claim deductions in the current manner."
"The removal of depreciation claims will have a double impact on strata property owners", Ms Arkcoll explains. "They will lose both the claim for depreciable items inside their unit and depreciation of their share of common plant and equipment. This will mean a reduction in annual tax deductions that in the early years of ownership range from approximately AUD $3,000 for a simple unit to over AUD $40,000 for an upmarket unit in a high-rise development."
"Until we see more detail we won't be able to fully assess the ramifications of the budget announcement. It is likely that we will be operating with uncertainty for an extended period until the draft legislation is released." And Ms Arkcoll continues, "The elephant in the room remains the government's ability to pass such a substantial change through a volatile senate."
Ms Arkcoll does have some good news for investors however: "Thankfully, there has been no change to the 2.5% Division 43 construction allowance which applies to most properties constructed in the past thirty years."
(Source: Leary & Partners)
