A draft Bill has recently been published to set up a register to be maintained by UK Companies House for beneficial owners of overseas entities that own UK property. Once the register has gone live (intended for 2021), there will be implications for overseas entities that are, or are entitled to be, the proprietor of land registered at the Land Registries for England/Wales, Scotland or Northern Ireland, or for parties dealing with them. Failure to comply with associated duties under the new legislation will seriously affect the overseas entity’s ability to sell, let or charge its land and it is a criminal offence for the entity and its officers at fault with fines and/or imprisonment as a potential result. Overseas entities should consider their UK land ownerships or proposed acquisitions to understand the implications of the legislation for their organisations.
The UK Government has been consulting on proposals for a register of beneficial owners of overseas entities that own UK property and the implications for conveyancing, and in summer 2018 published the draft Bill to give effect to the proposals.
A key policy driver behind the Government’s proposals is to improve the transparency around who ultimately owns land in the United Kingdom where the land is registered to an overseas entity. Where an overseas entity has been used as a vehicle in criminal activity, the current inability to access information about the individuals/entities who ultimately own or control the entity frequently hampers law enforcement investigations.
This follows a similar theme adopted for UK-registered corporate entities under the Persons with Significant Control (or “PSC”) regime. Under the PSC regime, since June 2016, UK-registered entities have (unless exempt) been required to take reasonable steps to ascertain and record in a dedicated register details of each individual who exercises control or significant influence over such entity (including the individual’s name, nationality, date of birth and address) – known as PSCs. Since June 2017, UK entities must notify Companies House whenever a PSC or their details change. There are five “Conditions” to consider when determining if an individual is a PSC and the assessment will be determined by a factual analysis of each situation. However, broadly speaking, a PSC is an individual who directly or indirectly holds over 25% of the shares or voting rights in the entity or who exerts a similar level of influence or control through other means, for example by having the right to appoint or remove the majority of the board or apply significant influence or control over the company. A company must enter the details of a PSC in its register within 14 days of the details being confirmed or ascertained and must provide the details to Companies House. Both the company’s PSC register and the information on file at Companies House will be open to inspection by members of the public. Only in certain limited circumstances can some or all of the details about an individual be kept confidential. The Bill provides for the creation of a new register of overseas entities at Companies House. Its primary objective, through the greater transparency created by the register, is to prevent the use of UK land by overseas entities to launder money or invest illicit funds. This register of overseas entities will for the most part be available to the public.
An “overseas entity” is a body corporate, partnership or other entity that in each case is a legal person governed by the law of a country or territory outside the United Kingdom. The legislation does not affect overseas individuals owning UK property directly or through a UK entity.
Although as a general principle the PSC register is intended to record details of the individuals who ultimately exercise significant control over a company, a UK company that is part of a chain of majority-controlled companies only needs to record in its PSC register the next UK holding company up the chain from it. If that holding company sits at the top of the corporate chain and keeps a PSC register, it records in that register the individuals who control it. If however, that holding company is not the top company in the chain but is in turn controlled by another UK holding company then this needs to be recorded in the PSC register of this first holding company and this pattern needs to be repeated up the chain. The rules therefore provide that a company’s PSC register must include not only any individual who is a PSC and registrable but also any relevant legal entity (“RLE”) that is registrable which includes a body corporate or firm that is deemed a legal person under its governing law.
Generally speaking, an entity is a RLE in relation to a UK company only if it is itself a UK company or LLP, an overseas company with shares listed on a specified stock market or an eligible Scottish partnership which, in each case, holds over 25% of the shares or voting rights in the UK company.
However, overseas entities that own UK property through a UK property holding company and form part of a UK company corporate chain may also then be captured by the PSC regime and need to be aware of the disclosure requirements. As the overseas company may not have its own PSC register and on the assumption that the company does not have shares listed on a specified stock market, it is not an RLE and so the overseas entity itself cannot be included in the PSC register kept by the UK company below it in the chain. Instead, the UK company must investigate up to the ultimate beneficial owner and management structures to ascertain if any individual(s) hold(s) a majority stake or otherwise exercises significant influence or control.
In short, the UK company can stop investigating further only when it reaches a holding company above it in the chain: (i) that is subject to the PSC regime, in which case that holding company’s controllers will be recorded in its own PSC register; (ii) that is subject to similar shareholder disclosure requirements under market rules, in which case details of that holding company’s major shareholders will be accessible to the public through stock market announcements; (iii) that is an eligible Scottish partnership, in which case details of the partnership’s controllers will be available from Companies House; or (iv) in which no person has a majority stake or exercises significant influence or control, in which case no person will be treated as a PSC of the UK company. If the UK company’s investigation leads to one or more individuals, it must of course consider in respect of each individual whether they have a majority stake, whether they exercise a significant influence or control over the UK company from their overseas position, or whether there are other arrangements at play (e.g. POAs from other shareholders granting that individual right to represent them at shareholder meetings) and, if so, whether they are registrable as a PSC.
The PSC regime is in force now and will be supplemented by the real estate register when it goes live in 2021. The conveyancing and other implications mentioned below will follow after that.
Registration at Companies House
An overseas entity that owns or is entitled to own UK registered land must register itself on the new Companies House register. As part of the application to register, details must be provided of the beneficial owners (or, unusually if no/incomplete information, managing officers) of the entity. The criteria for who will be regarded as a beneficial owner will be modelled on the PSC regime. Following registration, this “registered overseas entity” is given an overseas entity ID and has a duty annually to confirm the information on the register remains up to date, or to deliver updated information. Failure to do so is an offence.
The PSC regime focuses on the ability to control a UK entity, and as a result has its limitations in scope – for example, entities are not regarded as an RLE, or where the ultimate beneficial owners of the foreign company each own less than 25% and do not exercise a dominant board position, then no registration in the PSC register is required. The new real estate register is intended to look purely at ownership interests, and therefore those limitations in scope under the PSC regime should not apply, meaning the real estate ownership register will require a more diligent investigation and increased standards of disclosure.
Conveyancing implications for England and Wales
Government will enforce the Companies House registration requirements through introducing controls over the ability of overseas entities or certain parties transacting with them to register themselves at the Land Registry.
The transfer (or other disposition) of the land by the overseas entity will be valid, but compliance will be ensured through controlling registration at the Land Registry. There are several scenarios as set out below:
(i) Overseas entity seeking registration
A party transacting with an overseas entity will need to ensure that it has contractual protections to enable it to be registered at the Land Registry. To be registered at the Land Registry as the owner of a freehold estate or a leasehold estate granted for more than 7 years (known as a “qualifying estate”), the overseas entity must be either:
- a “registered overseas entity” (having complied with the registration and updating duties at Companies House); or
- an “exempt overseas entity” (which will be defined by regulation, although Government has in mind foreign governments and public authorities).
If it is neither, the overseas entity cannot be registered at the Land Registry and will not have legal title. This catches voluntary or compulsory registration of a qualifying estate that is unregistered, or registration of a disposition involving a qualifying estate that is already registered. It will not catch ownership of unregistered land where the owner chooses not to register, or is not compelled to do so.
(ii)Restriction on disposal
If an overseas entity is a registered proprietor of a qualifying estate and became registered pursuant to an application made on or after 1 January 1999 and whether or not it is an exempt overseas entity, the Land Registry must enter a restriction on the title to that estate. The restriction prohibits the registration of any transfer, the grant of a lease for more than 7 years or the grant of a legal charge. There are certain exceptions:
- the entity is a “registered overseas entity” or an “exempt overseas entity” at the time of the disposition (thereby satisfying the purpose behind the legislation);
- the disposition was made pursuant to a contract dated before the restriction was entered in the register;
- the disposition was made in the exercise of a power of sale or leasing conferred on the owner of a registered charge or a receiver appointed by such an owner. This exception provides comfort to lenders to overseas entities (whose charges are registered at the Land Registry) that key powers are not caught by the restriction; or
- pursuant to statutory obligation or court order (the Government cites as an example a tenant’s statutory rights to a lease renewal granted out of the overseas entity’s estate).
If the entity became registered pursuant to an application made before the new legislation commences, the Land Registry must enter the restriction within 12 months of commencement. However, the restriction (although it will appear on the register) will make clear that it does not take effect until the end of 18 months after commencement. See also the Transitional provisions at (v) below.
(iii)Where overseas entity disposing is entitled to be, but is not registered
If the entity became entitled to be registered as proprietor of a qualifying estate after this legislation came into force but is not registered, a transfer, grant of a lease for more than 7 years or grant of a legal charge by the entity cannot be registered unless an exception applies broadly similar to those mentioned above. This covers the situation where there is no restriction to control the disposition by the entity, because it is disposing before it is registered. Since the party transacting with the entity will not be entitled to be registered at the Land Registry, they will not have owner’s powers to further dispose of the estate.
(iv) Criminal offence
The legislation prohibits an overseas entity making a “registrable disposition” if the registration of the disposition is prohibited by a restriction or in the situation at (iii), both mentioned above. While the disposition itself is valid (so that for example a transfer and the payment of the proceeds pursuant to the transfer remain valid), it cannot be registered at the Land Registry (with the consequences set out at (iii) above) and the entity and every officer of the entity “in default” commits an offence in making the disposition.
This is a criminal offence (and the most serious offence in the Bill) and is punishable by a fine and/or imprisonment of up to 5 years. An “officer” of the entity includes a person in accordance with whose directions the board of directors or equivalent management body is accustomed to act (but not a person giving advice in a professional capacity). Being “in default” means that the officer authorised, permitted, participated in or failed to take all reasonable steps to prevent the contravention. The prohibition affects registrable dispositions of a qualifying estate, so any other transaction is not caught. So the prohibition does not apply if the overseas entity enters into a transaction that does not have to be registered at the Land Registry such as the grant of a lease for 7 years or less.
(v) Transitional provisions
If an overseas entity became the registered proprietor pursuant to an application made on or after 1 January 1999 but before the new legislation commences, it has 18 months from commencement to become a “registered overseas entity” (having complied with the registration and updating duties at Companies House) or an “exempt overseas entity”. If it does not do so (and does not dispose of the estate before the end of the 18 months), the entity and every officer in default (as mentioned above) commits a criminal offence punishable by a fine and/or imprisonment of up to 2 years. If the entity became registered prior to 1 January 1999, this new duty does not apply to them.
Secretary of State’s power to require registration
If the overseas entity became the registered proprietor pursuant to an application made on or after 1 January 1999 but is neither a “registered overseas entity” nor an “exempt overseas entity”, the Secretary of State can by notice require them to register in the register of overseas entities at Companies House within 6 months from the date of the notice. Failure to comply is a criminal offence punishable by a fine and/or imprisonment of up to 2 years, unless the entity became an exempt overseas entity during the 6 months.
Considerations for investors from the Middle East
Aside from tax planning, one of the main advantages of using offshore vehicles for investors from the Middle East acquiring UK property has been privacy. The draft Bill and the trend towards creating equality of treatment between UK and overseas entities owning UK property (through the PSC regime, and the global Base Erosion Profit Shifting project) has seen the erosion of a number of these advantages and a growing appetite amongst investors to use UK registered entities to hold title to property. It is therefore important for foreign investors to consider the remaining advantages in owning UK property through overseas entities. For example, the flexibility offered in structures such as protected and incorporated cell companies may now outweigh the associated costs both from a time and expense perspective.
When considering the above in relation to the PSC requirements, the identity of the holding company to be used to potentially acquire UK property shall need to be considered. For example, if the immediate holding company to acquire the UK property is in the UK, then the PSCs of that holding company would need to be registered and that holding company would need to be noted as the PSC of the property holding target company. That holding company would then need to decide who to note down as its PSCs. However, if the immediate holding company is not in the UK, then the PSCs for the property holding company would be determined by assessing whether the ultimate beneficial owners or managers/directors are themselves PSCs. To determine this, the way in which those individuals conduct their affairs (both legally and in practice) would need to be analysed to understand if there is anyone exercising majority control, or if they are deemed acting under a “Joint Arrangement” to determine which, if any, must be disclosed as PSCs. The PSC disclosure requirements shall further need to be considered by Middle East investors as the privacy of offshore vehicles being used is further eroded.