Examining the pros and cons of the various legal structures for acquiring and transferring an interest in real estate in Barbados; we will consider the issue both from a developer’s and a home owner’s perspective. It is important to note that residents and nonresidents are treated the same in terms of taxation and transaction costs in property transfer matters. There are no restrictions on foreign ownership of property in Barbados. There are, however, various other matters of which you should be aware that we cover in the sections below.
Simple Transfer by Way of Conveyance
Barbados law has as its root English law. Property is most often transferred via the fee simple interest in the real property. This method of transferring the property is the most common and the simplest and attracts a property transfer tax at the rate of 2.5% of the value of the transfer and stamp duty at the rate of 1% of the consideration both of which are payable by the vendor.
Property Transfer Tax
One of the most significant changes for the way in which property developments are structured in Barbados was the reduction on April 1, 2007 of the rate of property transfer tax from 7.5% to 2.5%. Prior to this change, there were various structures that had been devised to minimize the transfer tax payable. While they may have achieved the desired result from a tax perspective, they could give rise to other issues. The most popular of these structures was the sale of shares in an offshore company, typically incorporated in the British Virgin Islands (“BVI”). The developer would convey the property to a BVI company at an early stage when the value was still limited. The property would then be developed and the shares in the BVI company sold. This structure could be used for both condominiums and lots. If it was the sale of lots, it worked well as ownership was easy to transfer to the company. If it was the sale of condominiums, timing could be a problem. The ideal time to transfer the units was before they were built so that the value would be at its lowest. However, if the plans were not approved and the condominium declaration not registered until after the development was completed, the units would then have a much greater value when they were sold and this would defeat the purpose of conveying at a low value to reduce the transfer tax.
While the concept of share ownership rather than freehold title as a means of owning property is not new to Barbados, having been utilized in some projects going back thirty or forty years, it was not used very frequently until recently. In the past ten years, a number of developers issued shares in a property-owning company with a right to use a particular unit in the building, rather than transferring the freehold title to a condominium unit in the building. In these structures, the title to the property remains with the development company which issues different classes of shares. Each class of shares represents a different unit and certain rights and obligations relating to the unit and the common property are attached to the shares. While very effective for the developer from a property transfer tax perspective, such developments can create problems from a purchaser’s perspective. Apart from the legal question of whether you can attach property rights to shares through the articles of a company and any subsequent tax or VAT issues that may arise, the subscriber of the shares takes on all of the liabilities of the company which built the building. If the developer owes money to sub-contractors or if other claims are made against the developer, these are the responsibility of the new shareholders.
The concept of share ownership and freehold ownership has been mingled somewhat in what we will call a hybrid form of ownership structure. In this type of structure, a condominium declaration is registered in respect of the property, but unlike a typical condominium development, ownership of the individual condominium units is not transferred to the purchasers. Instead, the purchasers subscribe for shares in the property development company with the right to use a unit attached to the shares. While the issues inherent in a share ownership structure remain, the unit may be able to be used as collateral for a mortgage and the structure can also be converted to freehold ownership if the unit holder desires.
Financing from both local banks and external financial institutions, primarily from the U.K., is now available to developers. Notwithstanding the availability of financing for at least part of the development, a number of developers seek to finance their projects through stage payments from purchasers. This is very attractive from a developer’s point of view as it significantly reduces their interest expense. From a purchaser’s point of view, there may be considerable risk, however, in making stage payments on a property that you do not yet own. If the developer fails to complete or has other creditors who step in, the purchaser’s investment is not protected. Fortunately, most projects to date have been done by reputable developers with sufficient sales or other financial resources to complete the project. There are some ways in which the risk can be mitigated to an extent, but it can never be entirely alleviated. The developer’s track record and financial viability is important, as well as his reputation. Independent third-party certification of payments for work done can also assist. The numbers of pre-sales can also be a key factor since a developer that is on a tight budget with only limited sales will be more affected by delays or difficulties. In some instances, the purchaser may be able to take security, although this is not commonly done and can be challenging to properly put into place.
Mortgage facilities are now offered by several banks for overseas purchasers who are borrowing in US dollars. Such financing will not be available, however, for the stage payments referred to above, as the purchaser does not have any security to offer the bank until completion unless the purchaser has other assets that he may be able to use as security.
Exchange Control Approval
Barbados is still subject to an Exchange Control regime, Currently Exchange Control approval is still required for non-residents to buy or sell property in Barbados. Until recently a purchaser was required to remit the purchase price of a property to Barbados and register the funds with the Central Bank. When the property was sold, the registration was used as the basis to repatriate the sale proceeds. This requirement has now been relaxed and non-resident parties can transfer funds directly between themselves in foreign currency without having to bring the funds into Barbados. External companies are considered resident for exchange control purposes, although they may be required to register the funds for the purchase of the property with the Central Bank. Exchange Control approval is required for foreign currency borrowings by a resident or by a company controlled by non-residents. Foreign banks are also required to obtain Exchange Control approval if they intend to use property in Barbados as security.
Since the reduction in property transfer tax and increased liberalization of exchange control restrictions, we have seen a move away from the use of offshore companies and more complex type of structures in favour of a simple conveyance to the purchaser directly. The use of share ownership and hybrid structures is likely to continue to diminish and the most common form of ownership structure will be a condominium or individual freehold title. This is not likely to affect the issue of stage payments. As prime properties become scarcer, multi-unit buildings will become more prevalent in exclusive locations, such as the beachfront.
Prepared for Terra Caribbean’s The Red Book 2009 Pink Pages by: Mary Mahabir is an attorney-at-law with over 25 years experience at the Barbados Bar. She is a senior partner of Lex Caribbean based in Barbados. She specializes in corporate commercial law, with particular emphasis on financing transactions, property development and tax planning.
The information provided in this article is not comprehensive and is not intended to constitute professional legal advice for readers.