Transparency of Offshore Companies in Divorce

21 June 2018

The UK Government has agreed to an amendment to the Sanctions & Anti-money Laundering Bill which will see offshore company records being made public in the UK. This means that during a divorce, it would no longer be possible for someone to hide rental income that they had earned from property owned through an offshore company.

For related information see Finding Hidden Assets in Divorce.

What are Offshore Companies?

The term 'offshore' is generally used to refer to British overseas territories that are not subject to the same tax laws as mainland Britain. These include Bermuda, the Bahamas, the British Virgin Islands and the Cayman Islands, amongst others.

Many companies have been registered in these territories to avoid having to pay the full rate of tax that would be charged to them in the UK. A number of these offshore companies and their owners were exposed in the Panama Papers in 2016. The Panama Papers were produced by the International Consortium of Investigative Journalists (ICIJ) and they leaked 11.5m files belonging to a major offshore law firm. The files exposed prominent figures and companies that were using offshore companies to avoid paying tax in the UK.

How are Offshore Companies Used to Hide Income?

It has become more popular in recent years for wealthy investors to buy UK rental properties through off-shore companies. Aside from this tactic being an effective way of reducing income tax liability, it can also be used as a way of hiding rental income from family members.

If wealthy investors hide their property ownership in offshore companies, then they can understate the full extent of their assets and income during divorce proceedings. However, under the new rules this will no longer be possible.

What Does the Amendment Mean?

Under the amended rules, by 2020 offshore territories will need to provide public ownership registers. These registers will list all companies registered in that jurisdiction, any property these companies own in the UK and the individual or individuals who benefit from the income on these properties.

In order for an offshore company to register ownership of a property at the Land Registry, they will need to provide their registration number. This will prove that they are on the offshore company register. Without the registration number, it will not be possible to buy or sell the property, or to grant a long lease on it.

Some offshore territories have indicated that they are unhappy about the amendment and that they will challenge this move. One of the territories challenging the amendment is the British Virgin Islands.

What Does this Mean for Divorcing Couples?

Billions of pounds worth of properties in the UK are owned by offshore companies. The main reason for the amendment is to address criminal activity, tax evasion or money laundering, but full transparency will also be beneficial for other reasons, such as divorce.

Typically, Divorce Courts tend to split the matrimonial assets of divorcing couples down the middle. It's essential for the finances of each person to be fully transparent so that the Court can divide the assets in a way that's fair.

If one person is earning income from a rental property which is owned through an offshore company, then there is currently no way of proving this unless they choose to disclose this information. Under the new amendment, this information would be made publically available. A Divorce Lawyer would then be able to identify this income stream and ensure that it is taken into account during the divorce proceedings.

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