Companies House and the Land Registry have announced that the Register of Overseas Entities will come into effect on 1 August 2022. In this note, we look at the background to this new register, the obligations for overseas entities that own, acquire, sell or otherwise transact in UK property, and the potential implications for beneficial owners and others involved with such entities.
Background
On 1 March, the Government introduced the Economic Crime (Transparency and Enforcement) Bill to the House of Commons. In the words of business secretary, Kwasi Kwarteng, in his statement the previous day, the new law is intended "…to crack down on foreign criminals using UK property to launder their money….We will send a clear warning to those who have or who are thinking about using the UK property market to launder ill-gotten gains - particularly those linked to the Putin regime…".
The Bill was fast-tracked through Parliament and received Royal Assent in the early hours of Tuesday 15 March.
In addition to establishing a register of "Overseas Entities" (the O E Register) at Companies House, one of a number of measures designed to increase transparency of both overseas and domestic companies, the Economic Crime (Transparency and Enforcement) Act 2022 (the Act) will also reform the current statutory provisions on Unexplained Wealth Orders (see here for details).
In fact, the creation of an O E Register was initially proposed over 5 years ago, but its progress has been dogged by delay. Russia's actions in Ukraine have altered the timetable and catapulted these measures onto centre stage.
What does the Act do?
The Act creates the O E Register in order to record specific information about the entities (including details of their beneficial ownership) and creates a scheme designed to require such Overseas Entities to register if they own land. (Although the Act covers the UK generally, we deal here only with the provisions relating to England and Wales).
What is an "Overseas Entity"?
This is a legal entity that is governed by the law of a country or territory outside the UK. In this context, a legal entity is a body corporate or other such legal person.
What information will be included in the O E Register?
The register will record certain prescribed information about each Overseas Entity, including its beneficial ownership. The declarant is to provide a statement regarding beneficial ownership in one of three alternatives, as follows:
- that the declarant has taken steps to identify holders of a "registrable beneficial interest" and that it has no reasonable cause to believe there are any others, or
- that it has no reasonable cause to believe that there are any registrable beneficial owners, or
- that it has reasonable cause to believe there is at least one registrable owner that it has not identified, or that it is unable to supply information about one or more of the registrable beneficial owners it has identified, or both.
Where the declarant is unable to supply information regarding registrable beneficial owners (cases 2 or 3), the required information may be given instead in respect of a "managing officer" of the entity, which includes a director, manager or secretary.
Where a registrable beneficial owner is a trustee (whether an individual trustee or an entity that complies with specified conditions), certain information about the trust must also be given by the declarant, where available, as well as a statement as to whether the Overseas Entity has any reasonable cause to believe that there is required information about the trust that it has not been able to obtain.
A "beneficial owner" is defined and will include a person that:
- holds, directly or indirectly, more than 25% of the shares in an Overseas Entity;
- holds, directly or indirectly, more than 25% of the voting rights in an Overseas Entity;
- holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of an Overseas Entity;
- has the right to exercise, or actually exercises, significant influence or control over the Overseas Entity;
- has the right to exercise, or actually exercises, significant influence or control over the activities of a trust or other entity that is not a legal person under the law by which it is governed, where the trustees of the trust or members of the entity meet any of the conditions above in relation to the Overseas Entity.
As mentioned above, where a trustee is a registrable beneficial owner in relation to an overseas entity, information must be provided about the trust, the trustees and, in addition, about beneficiaries, the settlor and any "interested person" in relation to the settlement. An " interested person" is one who, under the terms of the trust, has rights in respect of the appointment or removal of the trustees or the exercise by the trustees of their functions. This would potentially include a protector.
For beneficiaries, settlors or interested persons in relation to the trust, to the extent they are individuals, the information required includes their name, date of birth, nationality, usual residential address and a service address. However, the information about beneficiaries, settlors and interested persons will generally be restricted to HMRC and other persons with functions of a public nature, and will not be on the public register at Companies House.
The Act includes a power for the Secretary of State to exempt persons from information requirements in specified circumstances. These include the interests of national security or for the purposes of preventing or detecting serious crime.
On completion of registration, Companies House will allocate an ID number to the registered entity, which is recorded in the O E Register.
The registered entity is under a duty to update the information as required by the Act. Failure to comply is a criminal offence committed both by the registered entity and every officer of the entity in default. Failure incurs a daily default fine and possible imprisonment.
How does this procedure apply to land ownership?
As set out in Schedule 3 to the Act, no application can be made to register an Overseas Entity as proprietor of a "qualifying estate" (that is the freehold or a lease of at least 7 years) in land at the Land Registry unless the entity is a registered entity or is exempt.
Furthermore, when the Overseas Entity wishes to sell, grant a lease of more than 7 years or charge a property, that disposal will not be registered at the Land Registry unless (subject to certain exclusions, set out below) that company is a registered entity or is exempt. In order to facilitate this, the Land Registry is required by the Act to include a restriction in the title register of all qualifying estates owned by Overseas Entities that have been registered pursuant to an application since 1 January 1999.
The exclusions include that the disposition is made pursuant to a contractual obligation pre-dating the restriction, pursuant to a court order, or pursuant to a statutory obligation .
However, the provisions in the Act are not only triggered on a sale, charge or purchase of an interest in property. Additionally, the Act empowers the Secretary of State to require an Overseas Entity to apply for registration in the O E Register within 6 months of notice if either the entity is or is entitled to be registered as proprietor of a qualifying estate.
The Act also provides that an Overseas Entity must not make a registrable disposition of a qualifying estate if registration is prohibited by a restriction entered in the register. Breach of this provision is an offence (punishable by a fine or possible imprisonment) by the company and its officers.
Overseas Entities that make an application for registration in the O E Register before the end of the transitional period (6 months after the Register comes into force, namely 1st August 2022) must make a statement as to whether they have made a " relevant disposition " of land since 28 February 2022. Such a disposition is a sale of freehold( or grant of a lease in excess of 7 years) unless the disposition is in pursuance of a statutory obligation or court order or occurring by operation of law, or is a disposition made by a "specified insolvency practitioner" in "specified circumstances" (which are yet to be defined by regulation). If they have made such a disposition, " relevant information" identifying the date of disposition and Land Registry title number must be included in the application.
In addition, an unregistered Overseas Entity and its officers commit an offence if in the same period, the Overseas Entity has made a relevant disposition of land and by the end of the transitional period it has not provided prescribed information to Companies House about the beneficial ownership of the Overseas Entity and (if it still has qualifying estates in England) has not registered as an Overseas Entity or made an application for registration, unless it is exempt. This offence is punishable with a daily default fine and possible imprisonment.
Are there any potential concerns about the proposed disclosure requirements for registrable beneficial owners?
Overseas entities are required to provide information about their registrable beneficial owners including for individuals their name, date of birth, nationality and usual residential address, a service address and the date on which the individual became a registrable beneficial owner in relation to the overseas entity.
The Register of Overseas Entities will be publicly available. However, some information will be "protected information" and will not be publicly available. For individuals, protected information will include their residential address and the day of the month on which they were born.
In contrast, required information about trusts may only be disclosed by the registrar to HMRC or any other person who has functions of a public nature and is specified to receive such information by the Secretary of State. This would include information about the trust itself, the trustees, beneficiaries, the settlor and any interested persons within the meaning of the Act.
Many people may not be concerned about information identifying them being publicly available, or others may hold property through a trust or similar structure whereby information will not be available to the public, or through a nominee arrangement where they do not qualify as beneficial owners of the nominee.
However, many other people who have chosen to acquire property through an overseas entity with an interest in that entity that is likely to exceed the relevant threshold, have done so with the sole or primary intention of ensuring that their ownership of the property remains confidential.
For such individuals, just as for beneficiaries of trusts, settlors or protectors, the existence of a register that allows HMRC or other law enforcement bodies to identify them as owners is not an issue; rather it is the public availability of the information on the register that is a concern.
The Act does provide for the Secretary of State to be able to make provision for information regarding a specified individual to be unavailable for public inspection. As anticipated, the grounds for such an application to be made and accepted are limited. The applicant must show that they reasonably believe that if the information they are seeking to withhold is available for public inspection, or otherwise disclosed by the registrar, the activities of the Overseas Entity (or one or more characteristics or personal attributes of the relevant individual associated with the Overseas Entity) will put the relevant individual or a person living with them at serious risk of violence or intimidation. These are the same grounds that apply to information on the PSC register.
While many wealthy international individuals live with the constant threat of kidnap or other dangers to themselves or their family members, these grounds are still likely to be challenging to make out.
Will the Act achieve the aims for which it is intended?
Concerns were raised that the rules would not provide transparency in relation to nominee arrangements (otherwise known as bare trusts), whereby an Overseas Entity holds property as nominee for the underlying beneficial owner of the property. In this situation, the "beneficial owner" for the purposes of disclosure on the register will be those with shares, voting rights or other form of control or influence in or over the Overseas Entity. These may not be the same people as the underlying beneficial owner of the property.
While there is still no requirement to identify a beneficiary of a trust (whether bare or otherwise) of which the Overseas Entity itself is the trustee, it is worth noting that non-UK trustees (which would include nominees) are likely to be subject to a separate obligation to register on the Trust Registration Service (TRS).
For non-UK trustees, this obligation was previously restricted to those that were taxable in the UK. However, the scope of the register has been expanded to include, among others, non-UK trusts where all trustees are non-UK resident and they acquire land or property in the UK directly, or have acquired such land or property on or after 6 October 2020, known as "Type C trusts". The initial deadline for registration for trustees in this position is 1 September 2022 or 90 days after establishment of a trust, whichever is later.
As a trustee holding UK property for the benefit of another person or persons, an Overseas Entity would be required to disclose on the TRS details of the underlying beneficiaries or, where appropriate, of the beneficial class. While this provides transparency in regard to arrangements not caught by the O E Register, the TRS does not have such a lengthy retrospective effect as that register.
In many cases, information on the TRS is available to people who are able to demonstrate a "legitimate interest" in accessing that information, for example an investigative journalist who is looking into a particular instance of money laundering or terrorist financing. However, information about Type C trusts, among others, is not accessible even to those making such a request. Instead, it is available only to HMRC and law enforcement agencies.
Next Steps?
Given the retrospective nature of the legislation, and the penalties for non-compliance, any Overseas Entity that has acquired property in England and Wales since 1 January 1999 should begin now to take the necessary steps to identify relevant ownership structures.
In this way, they will be in a position to make the appropriate application for registration once the register is available, from 1 August onwards.
Individuals who own or are interested in property held through structures involving Overseas Entities should undertake the same review process to ensure that they too are ready for registration.
This note is made available for general information. The content should not be used as a substitute for legal advice. If you have any queries arising from this note or the legislation more generally, please contact either of the authors or your usual contact at Howard Kennedy.
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