Most people think offshore wealth is hidden in tax havens. Kristin Surak explains how it’s the complex relationships between offshore structures that allow people to hide their personal wealth. What is more, many of the key jurisdictions are under the political umbrella of the UK to varying degrees, allowing the Government to push for more transparency around ownership.
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Wealthy individuals regularly protect their assets through offshore structuring. For example, they might create a shell company to hold a piece of real estate rather than owning the property outright, a technique known as “wrapping”. The upshot is that they don’t own the property directly but instead own a company that owns the property. Historically in the UK, this brought certain tax benefits as well as some privacy concerning ownership.
How does such offshore structuring work in practice? The question seems almost intractable since an important motive for using offshore structures can be to keep things secret. However, recent transparency initiatives have changed the game – to some degree at least. Matching multiple publicly available datasets, Johnathan Inkley and I have mapped two key layers of offshore structures that individuals use to hold personal property in the UK. This allows us to peer into this usually opaque world.
Our analysis reveals three key patterns of offshore formations. We identify exactly which jurisdictions people choose, patterns in how those jurisdictions link to each other, and possible differences in what different offshore locations do and why. The result is a pioneering analysis of the scope, scale, and key formations of how wealthy individuals structure personal property, which has important implications for policymaking.
The interconnected web of tax havens
Contrary to popular belief, offshore wealth structuring is not about single tax havens. Rather, it’s about the relationship between jurisdictions. The UK may be a globally important offshore financial centre or even tax haven, but it cannot be a tax haven to itself. What defines offshore is the benefits gained by leveraging the differences between legal regimes. People seek the benefits afforded by legal carveouts or the advantages given to foreign entities, as well as the possibility for playing the differences between legal systems to create “calculated ambiguity”. The upshot is that any analysis of offshore wealth needs to be attuned to the relations between the layers of offshore structures.
Contrary to popular belief, offshore wealth structuring is not about single tax havens.
From our data, we can see two key layers of their offshore structures (Figure 1). At the bottom is a foreign shell company or trust that holds the property itself. This is layer that the structure uses to enter into the UK and own the property. Above it is the “action layer”, where – under UK reporting requirements – the offshore structure does its work, which is usually one of two outcomes: either an individual beneficial owner is reported to the Government, or their identity is further obscured by offshore structures.
Figure 1: Direct Ownership vs Offshore Ownership
To understand how wealthy people use offshore entities like shell companies and trusts to hide property ownership, we focus on expensive residential real estate, or property transacted for at least £1 million. Legal reforms since 2022 have required people to publicly report if they hold UK property through overseas entities. However, the UK government also made it relatively easy to avoid this requirement: as long as no single individual holds 25 per cent or more of the entity, no owner need be reported. This enables hiding. As Figure 2 reveals, the owners remain hidden in over one quarter of the reported cases, effectively “ghosting” the government.
Figure 2. Publicly Declared Ownership Structures.
Although offshore entities might be created anywhere in the world, we find that most people who keep their identities hidden chose either the British Virgin Islands (BVI) or Jersey in equal measure to enter into the UK property market. These two jurisdictions alone account for around 60 percent of all entry-layer wrapping (Figure 3, bottom bar). The Isle of Man and Guernsey follow them, with just over 80 percent of all expensive residential properties in total being held through these Crown Dependencies and Overseas Territory.
Figure 3. Jurisdiction Choice of Corporate Beneficial Owners
When we pick apart the relationship between these layers, we find some interesting results, Not all jurisdictions connect to others in the same way. BVI takes on an octopus-like form, Jersey connects both to itself and a few other places, while some jurisdictions like Liechtenstein connect just to themselves.
Figure 4. Entry-Jurisdiction and Action-Layer Jurisdiction Used When Ownership is Hidden
Analysing the relationship between the layers reveals three predominant formations, laid out in Figure 4. Some entry-layer jurisdictions act as global funnels that are a “go-to” option and draw in action-layer offshore entities around the world. BVI, Bahamas, and Luxembourg instantiate this pattern. Others, like Jersey, Guernsey, and the Isle of Man, are selective gateways that connect to action-layer entities both at home and abroad. And a few places act as self-stackers where the action-layer entities chose to put their entry layer entities where they are, or “at home”.
Figure 5. Patterns of Connection Between Entry-Layer Jurisdictions and Action-Layer Jurisdictions
UK jurisdictions are a gateway for other offshore jurisdictions
These predominant patterns can also be visualized by a cross-sectional comparison of how they connect (Figure 4). As a global funnel, BVI is used to connect into the UK from jurisdictions around the world. Jersey, a selective gateway, is used by shell companies and trusts located elsewhere, but also by those already in Jersey. By contrast Gibraltar, as a self-stacker, is used almost exclusively by shell companies and trusts already in Gibraltar.
They may be “offshore” to the UK, but their partial sovereignty still furnishes London with some levers of influence.
Do different jurisdictions operate differently? One of our interesting findings concerns the British Virgin Islands. Action-layer entities in the BVI hold fewer shell companies and trusts in the entry layer – an average of just 1.37 versus 3.37 for Jersey. Plus, shell companies or trusts in the BVI are much less likely to put down a BVI address as the place where correspondences are to be sent (Figure 6). The upshot is that the BVI appears to be operating mainly as a “brass plate” location. That is, the jurisdiction is used by service providers who not in the BVI but elsewhere. Other locations, by contrast, appear to be providing more substantial business operations (“substance”, as it is frequently known). The use of jurisdictions as “brass plates” presents significant risks when it comes to background checks. BVI, for example, presumes that the required due diligence checks on the clients and source of funds are carried out elsewhere rather than ensuring that they are done within its jurisdiction. The result is a risk for verification.
Figure 6: Alignment Between the Correspondence Address and Location of the Action-Layer Entity
This has important implications for policymaking. Our research reveals that BVI in particular is used by service providers located globally. The IMF has raised concerns about such configurations resulting in weakened due diligence checks on the clients and the origins of the money involved. We show that those risks may obtain for around 30 per cent of the expensive residential properties in the UK for which ownership remains hidden.
Our work also shows that the jurisdictions that individuals use for their action-layer entities are limited – and limited, in the main, to jurisdictions still under the political umbrella of the UK to varying degrees. They may be “offshore” to the UK, but their partial sovereignty still furnishes London with some levers of influence. If the UK makes a stronger push for the full implementation of transparency initiatives in its dependencies and overseas territories, it may be able to reveal a tranche of beneficial owners behind the action layer.
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All articles posted on this blog give the views of the author(s), and not the position of LSE British Politics and Policy, nor of the London School of Economics and Political Science.
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