T
he Enforcement Directorate's (ED) spotlight has fallen on affluent Indians who have been using offshore companies to acquire properties in the UK. This practice, which involves buying shares of foreign firms that primarily hold properties, is a breach of India's foreign exchange laws. The British government's requirement for beneficial ownership details since 2023 has led to the exposure of these investors' identities.

    Well-heeled Indian families have been using this loophole to avoid stamp duty, capital gains tax, and inheritance tax on their UK property investments. However, with the ED inquiring about the actual assets behind overseas stock investments declared by resident Indians, and the UK mandating beneficial ownership disclosure since 2023, these tax advantages are being eroded.

    At least four individuals have received notices from the ED for owning shares of companies that own properties, either based in the UK or other jurisdictions. According to Moin Ladha, partner at Khaitan & Co, "Overseas investment in a foreign company that only owns property and doesn't engage in any other legitimate business is not permitted." He suggests that the RBI could consider permitting such transactions, given the opportunities for real estate investment in countries like the UK and UAE.

    The 2022 RBI guidelines on overseas investments have made it clear that individuals cannot buy unlisted shares of offshore companies engaged in financial services and real estate. However, buying into an entity that predominantly owns properties is prohibited, a rule aimed at discouraging trading in realty. With the exchange of information between countries, it's possible that the UK has shared beneficial ownership details with India.

    Practitioners believe that this information can be used by tax authorities to reconcile disclosure made in respect of foreign assets and by enforcement agencies for scrutiny of property owners. The perception is that a greater scrutiny of property owners followed the huge Russian money chasing London properties and US sanctions against Russia.