Beneficial ownership register for Overseas Entities owning UK property

In light of Russia’s actions in Ukraine in recent days, the UK government has brought forward the implementation of the Economic Crime (Transparency and Enforcement Bill) (the “Bill”). The Bill will, amongst other measures, introduce a public register of beneficial ownership of UK property held by non-UK companies and similar entities.

The exact timescale for the register being brought into force is unclear but it will clearly be soon: the Bill received its first reading in the House of Commons on 2 March 2022. Tabled amendments were published on 7 March with the second and third readings taking place on the same day. The government announced that implementation will proceed “at pace” and we will update this note as and when amendments to the proposed legislation become clearer.

While the immediate trigger for the introduction of the Bill is the Ukraine crisis, its effect will be felt far more widely than on Russians.

This note is an overview of what we know about the proposed new rules at present, including areas of uncertainty. The terms of the Bill may change before it becomes law and more detailed analysis will follow as the Bill progresses through Parliament and as guidance emerges from the UK government and its agencies.

Who needs to be aware of the Bill?

Those who may to be affected by the new law and should understand its terms to check whether they are and what they need to do are:

• non-UK companies that own UK real property and their shareholders and officers;
• non-UK corporate trustees holding UK real property directly or indirectly;
• settlors, protectors and beneficiaries of non-UK trusts that hold UK real property directly or indirectly;
• foundations that hold UK real property and their founders, board members and beneficiaries; and
• non-UK partnerships that hold UK real property.

What is the background to the Bill and what are the Government’s objectives? 

The possibility of introducing a public register for overseas corporate owners of UK property was discussed in 2016 and a draft Registration of Overseas Entities Bill was published in July 2018 but was not enacted at that time.

The stated purpose of the new Bill is to “to crack down on foreign criminals using UK property to launder money [and] ensure criminals cannot hide behind secretive chains of shell companies”.

The register accompanies other initiatives, including the People with Significant Control (PSC) regime, the Trust Registration Service (TRS), suspicious activity reports and unexplained wealth orders.   

What are the proposed new rules? 

In broad terms, the Bill will require overseas companies or similar entities that are the registered proprietors of UK residential or commercial property to investigate and provide details of their beneficial owners or individuals who control them to UK Companies House. The information will appear on a register that is publicly accessible.

Which overseas entities are caught? 

There are three requirements that must all be met for registration to be necessary:

• there must be an “entity”.  This means that the body in question must be regarded as a legal person under the law by which it is governed. Limited companies and some partnerships will be entities for these purposes;
• the entity must be overseas. This means it must be governed by the law of a country or territory outside the UK; and
• the entity must be the registered proprietor of UK real property, whether residential or commercial.  In other words, the entity’s name must be on the title of the property at the UK Land Registry.  In England and Wales, the registration requirements apply where the interest that is owned is a freehold estate or leasehold estates granted for a term of more than seven years defined in the Bill as “qualifying estates”. The criteria differ in Scotland and Northern Ireland.  

Are trusts and foundations caught? 

Trusts are not included within the definition of “overseas entities” (since they do not have legal personality and cannot directly hold land).  However, trusts that hold UK land may do so through a non-UK company and that company itself will probably be an overseas entity that must register and may be required to provide details of individuals associated with the trust.

Foundations are likely to be caught because they are usually considered to have legal personality in the country whose laws govern them.

The impact of the rules proposed in the Bill is addressed further below.

Does the Bill catch new land purchases only or does it affect overseas entities that acquired UK land some time ago?

Overseas entities that own UK land acquired on or after 1 January 1999 will be required to register. 

What details will need to be provided for the purposes of the register?

Overseas entities that are caught by the new rules will have to provide the following details for inclusion on the UK public register of companies:

For the overseas entity, the information required to be registered will be:

• name
• country of incorporation
• registered or principal office;
• a service address;
• an email address;
• the legal form of the entity and the law by which it is governed;  
• any public register in which it is entered and, if applicable, and
• its registration number in that register.

For the beneficial owners, the information required to be registered will be:

• name;
• address;
• date of birth;
• nationality;
• usual residential address;
• service address; and
• the date on which the individual became a registrable beneficial owner in relation to the overseas entity

The register will be accessible (presumably online) to the public, as with the PSC register, but individuals’ residential addresses and their full date of birth will not be publicly available.

Who are regarded as the “beneficial owners” of an overseas entity?  

“Beneficial owners” are individuals, governments and public authorities or other legal entities that meet one or more of the following five conditions:

• Ownership of shares - they hold, directly or indirectly, 25% of the shares or voting rights in the entity;
• Voting rights - they hold, directly or indirectly, more than 25% of the voting rights in the entity;
• Right to appoint or remove directors - they hold the right, directly or indirectly, to appoint or remove a majority of the board of directors of the entity;  
• Significant influence or control - they have the right to exercise, or actually exercise, significant influence or control over the entity; and  
• In respect of trusts, partnerships and other entities without legal personality - if the trustees of a trust, or the members of a partnership, unincorporated association or other entity that is not a legal person under the law by which it is governed meet any of the conditions specified above (in their capacity as such) in relation to an entity, the beneficial owners will consist of any persons who have the right to exercise, or actually exercise, significant influence or control over the activities of that trust or entity.

“Exercising significant influence or control” is not yet defined and there has not been guidance released confirming this. The identical phrase is used in the PSC register so we assume that its meaning it will align with the meaning set out in PSC guidance.

Where shares in an overseas entity are held by a nominee, the shares will be treated as if it were held by the beneficial owner.

Overseas entities will be required to take “reasonable steps” to identify their beneficial owners but there is no definition yet of what is “reasonable” and further guidance will be needed on this.

What if the overseas entity has no beneficial owner in the categories above?

If an overseas entity is not able to provide the beneficial ownership information because there are no beneficial owners falling within the categories described above, it will need to provide information about its ‘managing officers’, who will include directors, managers and secretaries. 

What is the impact on non-UK trust structures that contain UK land?

We envisage the following scenarios where questions about the registration obligations of a non-UK trust will be relevant:

• Under the current proposals, a non-UK trust owning UK land directly will not be required to register details of its beneficial owners with Companies House because a trust does not fall within the definition of “overseas entity”. Instead, the trust may need to register with HMRC’s TRS (although crucially that register is not open to public inspection).  However, see also point 3 below in respect of corporate trustees.
• 
  
• Where a non-UK trust owns shares in a non-UK company and the non-UK company owns UK land, the non-UK company will be required to register. If the settlor, protector or beneficiaries can or do exercise significant control or influence over the activities of the trust, their details will need to be provided for the register.
• 
  
• On the face of it, a non-UK corporate trustee that owns UK property as part of a trust fund would be subject to the requirement to register itself and to provide details of its own beneficial owners (rather than the details of the beneficial owners of the trust it administers) as it is an overseas entity owning UK property.  However, it seems unlikely that this is the intention of the Bill, as such arrangements are generally already covered by the requirement to register with HMRC under the TRS and we hope further clarity on this will emerge.

What happens if a non-UK company holds land as a nominee only?

There is some uncertainty in relation to this point under the Bill and one would expect this to be expanded in official guidance.

For example, a Jersey company owned by a professional trust business is the registered owner of UK land. The company holds the land as nominee for Mr X, who does not own any shares in the company or the professional trust business.

On the face of it, it appears Mr X would not need to be on the register: he might be classed as the beneficial owner of the property but he is not a beneficial owner of the company. However, it may be argued that his ability to direct the company or provide instructions to the company in relation to the property amounts to significant influence or control over the company.

This appears to be a lacuna in the Bill and we hope there will be further guidance on it.

What is the impact on partnerships?

Broadly, partnerships will fall under the legislation if they are legal entities in the jurisdiction by which they are governed. If a partnership is classed as an overseas entity, then partners in that partnership will not necessarily be treated as beneficial owners: it will be necessary to assess them against the conditions above.

Are there any exemptions? 

As currently proposed, the Secretary of State can make provisions for overseas entities to be exempt on the basis of national security, economic wellbeing of the UK or for the purposes of preventing or detecting a serious crime. There is an exemption for indirect beneficial owners where the beneficial owner’s interest in the overseas entity is itself subject to certain other disclosure requirements.

What are the deadlines to register?

The deadline for registration was originally proposed to be 18 months from the commencement date of the new law but amendments carried on 7 March reduced this to six months. Whilst we do not know exactly when the commencement date will be, it is likely to be very soon and we will update this note once further information is forthcoming.

In order to ensure that this date is complied with, the Bill provides that the Land Registry (which manages and controls the register of ownership of all UK property) must put a restriction on land owned by an overseas entity that will limit the ability of the overseas entity to deal with it.  Originally, it was proposed that this restriction will be put on the register within 12 months of commencement of the new law but will not have effect until 18 months from commencement. However, following the second and third readings in the Commons, the Land Registrar will now be required to enter a restriction prohibiting certain dealings in land by an unregistered overseas entity six months after the provisions come into force. We assume that the restriction will limit changes to legal ownership of the property unless and until necessary registration has taken place.

What are the consequences of failing to register? 

The Bill states that individuals who try to sell or lease property without first publicly declaring its beneficial owner may face potential imprisonment and daily fines of £500 .  It will be an offence to deliver misleading, false or deceptive material to the registrar or deliver false, misleading, deceptive statement.

Failure to register and update the beneficial ownership register at Companies House will also be punishable with imprisonment and fines. There is a requirement to update the register every 12 months.

In addition to criminal penalties for non-compliance, the Bill provides that a failure to register, or to comply with the updating requirements, will result in:

• an overseas entity being unable to register as a proprietor of land in the UK at the Land Registry; and
• certain dispositions made by an overseas entity registered proprietor being incapable of registration at the Land Registry. In practice this means that a failure to register, or to comply with the updating duty, will in most cases affect the ability of the entity to either sell or lease the land, or create a charge over it.

What is the interaction of the new register with the TRS? 

It is not clear whether the overseas entities will be required to register twice (once with Companies House and once under the TRS) if they fall under both. It is unlikely that there will be double registration but it is important to note that the TRS is not public but the Register under the Bill will be publicly accessible.

The Government intends to publish guidance to help overseas entities, third parties transacting with overseas entities and facilitators to understand the requirements of the Bill. It is expected that the government will provide further guidance and include a detailed explanation of the position of trusts within the registration requirements, and examples of the circumstances in which we would expect overseas entities holding property on behalf of a trust to register.

If you have any questions regarding the proposed new register or would like to discuss in detail about how the rules will impact you, please contact Alex Ruffel and Yousafa Hazara.

The note is for general information only and does not constitute legal or tax advice on which you can rely.  We would be pleased to assist if you require advice about your own or your clients’ affairs or particular circumstances. 

Irwin Mitchell LLP