The draft Bill has now been published to set up the Companies House register 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 impact on 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. Overseas entities should consider their UK land ownerships or proposed acquisitions to understand the implications of the legislation for their organisations.
In April 2018, Law-Now reported on the UK Government’s proposals for a register of beneficial owners of overseas entities that own UK property and the implications for conveyancing.
In July, the draft Bill to give effect to the proposals was published.
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, frequently encountered, to access information about the individuals/entities who ultimately own or control the entity hampers law enforcement investigations.
This can be contrasted with the position for UK-registered entities, which since June 2016 have been required to identify each person with significant control over the entity and to record their details in a dedicated register (the PSC register) and, since June 2017, to notify Companies House whenever a PSC or their details change. Broadly speaking, a PSC is an individual who holds over 25% of the voting rights in the entity or who exerts a similar level of influence or control through other means.
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, therefore, affect overseas individuals owning UK property directly or through a UK entity.
It is intended that the register will be operational in 2021 and the conveyancing and other implications mentioned below 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 none/incomplete information, managing officers) of the entity (the criteria for who is a beneficial owner are 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.
Conveyancing implications for England and Wales
This Law-Now focuses on the Bill’s conveyancing implications for England and Wales.
The method by which the Government will enforce Companies House registration is through introducing controls over the ability of overseas entities or certain parties transacting with them to register themselves at the Land Registry.
Under the original proposals, if there were no Companies House registration, a transfer of land by the overseas entity would have been void so that the beneficial interest would not pass. After opposition to the proposal, Government changed its mind and the transfer (or other disposition) remains valid; controlling registration at the Land Registry is the method to ensure compliance. There are several possible scenarios.
(i) Overseas entity seeking registration
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, it 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 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.
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.
The Government is consulting on certain questions about the draft Bill with a deadline for responses of 17 September 2018.