(First published March 2022 by Osborne Clarke authors)
Overseas entities affected by the new legislation should assess their position now as the deadline for compliance is just six months from implementation
The UK's Economic Crime (Transparency and Enforcement) Act 2022 was rushed through Parliament in just over two weeks in response to the war in Ukraine. It brings into law a requirement that overseas entities holding UK real estate must disclose their beneficial owners.
1. New register applies to overseas entities only
The "register of overseas entities" will be relevant where UK real estate is held by a non-UK legal entity (as opposed to by an individual or by a UK entity).
UK entities already have to disclose their beneficial ownership information under the people with significant control (PSC) regime. While the tests are broadly the same, overseas entities will have to provide more information than UK entities do under the PSC register.
2. Applies to holders of registered real estate
The register will apply to overseas entities who hold freehold titles or leasehold titles of longer than seven years in England and Wales – referred to as "qualifying estates". (Slightly different rules will apply in Scotland and Northern Ireland but the broad principle is for it to apply to all freehold and registrable leasehold titles throughout the UK.)
3. Comes into effect….soon
We don't yet know exactly when the register will come into effect as the government still has to set the implementation date. The date will largely depend on how quickly Companies House and the UK's Land Registries can get their systems up and running. But they say they are working "at pace" and there is considerable political pressure to make the register live as soon as possible.
Once the legislation comes into force, overseas landowners have six months to make their registration application. They will need to disclose details of all dealings since 28 February 2022 (when the Economic Crime Bill was first introduced to Parliament). This includes not only sales of UK real estate, but also charges and the grant of leases with a term of seven years or more.
4. Applies to most existing landowners as well as new purchasers
The requirement to register will apply to any overseas entity which holds UK real estate. It applies to both those making new acquisitions and those with existing holdings, unless the land was acquired pre-1 January 1999 in England and Wales (with different dates applying in Scotland and Northern Ireland).
5. Disclosures are extensive
Overseas entities will need to disclose the name and address of their beneficial owners. They will also need to state the date on which the person became a beneficial owner and the nature of the person's ownership.
The definition of beneficial owner will follow the definition used in the PSC regime, which itself is derived from international anti-money laundering definitions. A beneficial owner is someone who holds directly or indirectly more than 25% of the votes or shares in the overseas entity, has the right directly or indirectly to appoint or remove a majority of the overseas entity's board or has the right to exercise or actually exercises significant influence or control over the overseas entity. There are further rules if interests are held via entities that do not have legal personality (such as trusts or limited partnerships found in fund structures). There will be adaptations for overseas entities which are not similar to UK companies limited by shares.
As a backstop, entities unable to provide their beneficial ownership information will have to provide information on their managing officers instead. This is not a feature of the PSC regime, which sometimes results in no information being disclosed when no beneficial owner information can be identified. It is being introduced for this register because the government considers it important to ensure that there will always be at least some additional information on the control of overseas entities.
In addition, in response to concerns about the use of trusts to hide beneficial ownership information, where the registered beneficial owner is a trustee, information about the trust must also be filed. This is also not a feature of the PSC regime.
6. Register will be public
The registered information will be publicly available except for the date of birth and residential addresses of individuals and information about trusts which will only be disclosable to HMRC (the UK's tax revenue authority) and to other relevant bodies.
As with the PSC register, there will be a limited protected disclosure regime which be set out in separate regulations. It is likely that, as with the PSC regime, this will only apply if the publication of information would result in a serious risk of violence or intimidation.
7. Ongoing updates
Registered overseas entities will have to update their beneficial ownership information at least every 12 months.
Once a registered overseas entity stops being a registered proprietor of land, it can apply to be removed from the register.
8. Impact for overseas entities dealing with land
Once the regime comes into force, no overseas entity can be registered at the UK Land Registries as the proprietor of a legal estate in UK land unless it has first been registered on the new beneficial ownership register at Companies House or is exempt from Companies House registration. It is therefore critical that all registration formalities are in order prior to committing to completion of a purchase or lease.
Overseas entities who are already owners of UK land will have a restriction put on their Land Registry title. This will prevent them from dealing (buying, charging or granting a lease of seven years or longer) unless they are registered on the beneficial ownership register at Companies House or are exempt from registration.
There are also criminal sanctions for defaulting entities and their officers.
9. Impact for those dealing with overseas entities
To protect third parties, the restriction that prevents an overseas entity dealing with their property title will not apply in certain circumstances. These include: where a lender is enforcing its security, certain insolvency situations and a transaction completing under a contract which pre-dated the restriction. It remains unclear whether the contract exemption extends to as yet uncertain contracts, such as options, and what evidence will be required where the contract includes strict confidentiality provisions prohibiting its disclosure.
Anyone purchasing land or taking a lease for seven years or longer from an overseas entity will need to add checking the beneficial ownership registration to their due diligence. If the registration is not in order, the purchaser or tenant will be unable to register their own interest due to the restriction on the overseas owner's title prohibiting dealings. No registration means no legal interest so it is important that completion does not take place unless the third party is in a position to satisfy the title restriction.
10. Further measures in the pipeline…
This important regime has been passed through Parliament at speed and requires significant new processes to be implemented and resourced in what is likely to be a short space of time.
Provision is made within the Act for further rules to be made by the Secretary of State as necessary. Of particular note is the intention to make further rules aimed at reducing the risk of fraudulent applications and the supply of inaccurate information. This is likely to dovetail with ongoing work to improve the processes for the verification of all information registered at Companies House.
A second Economic Crime Bill is expected to be presented to Parliament later this year which we anticipate will focus on tightening the enforcement regime.
Osborne Clarke comment
Investors and developers who hold UK real estate via offshore special purpose vehicles will be well used to sharing ultimate beneficial ownership information as part of anti-money laundering regulation and existing "know your customer" processes. With the deadline for compliance for overseas entities now just six months from implementation, it is important that those affected begin to assess their position now.
About the authors
With thanks to OSBORNE CLARKE for allowing us to share articles & blogs from various leaders and employees