Here’s One We Made Earlier
The new Act is largely a rehash of a previous piece of legislation, the Registration of Overseas Entities Bill which was drafted in July 2018 but was set aside for what were no doubt salient reasons. The idea for the Register itself goes back to commitments made by David Cameron following the furore over the Panama Papers in 2016.
As such, the key takeaways from the legislation are that:
- Despite the headlines, the Act and the Register itself is not targeted against Russian individuals or companies.
- Instead, the Register in designed to be a register of all overseas entities and their UBOs holding UK real estate akin to the current Persons with Significant Control (“PSC”) Register for UK registered companies.
- Although there are criminal and other sanctions in the Act, its main purpose is to promote transparency of ownership (but whether or not such ownership reveals sanctions busting, tax avoidance, money laundering or other financial crimes is a separate question).
- There will be a significant impact on all overseas entities’ ability to deal with land in the UK given a need to declare their beneficial ownership before being able to do so.
- There is a 6-month grace period from the date the Register went live (1 August 2022) for overseas entities to register their UBOs. This means that relevant overseas entities will need submit their applications on or before 31 January 2023 in order to deal with their UK property.
Your Name Will Also Go On The List
The Register (which is administered by Companies House) acts as follows:
- All overseas entities that hold or intend to hold an interest in land (i.e. freehold or a long lease of more than 7 years in length, or the equivalent in Scotland) in the UK must:
- identify their UBOs; and
- register them on the Register.
A failure by an overseas entity to take reasonable steps to identify their UBOs or give information to the registrar of the Register when requested may result in a fine or custodial sentence.
Once an overseas entity has obtained the required information to submit their application, they must have it verified by one of the categories of relevant persons permitted to do so by the Register of Overseas Entities (Verification and Provision of Information) Regulations 2022 (the “Regulations”). Once an application has been verified, it can then be submitted to Companies House. The fee for applying to the register is £100.
The overseas entity will then be given a registration number (an “overseas entity ID”) which it must use for dealing with land (whether as an acquisition or disposal) at the Land Registry.
Basic information about the following will be publicly available at the Register:
- The UBO (including name, nationality, and service address), the date of birth and residential address must be supplied but will not be published unless the UBO “has functions of a public nature”;
- The ‘Managing Officers’ of the overseas entity; and
- The overseas entity itself, including its name, country of formation, legal form and registered/service addresses.
There will be a duty for all overseas entities to update the Register every year. A failure to provide this update can result in criminal sanctions, including daily fines of up to £500. The officers of the overseas entity may be personally liable for a continuing breach (whether or not it was their original obligation to update the Register) and so also subject to a £500 per day fine.
There will be a 6-month grace period for the initial registration by overseas entities on the Register. During this time, they may deal with their property interests as normal without an overseas entity ID but the overseas entity should be preparing to submit their application during this grace period and must include in its application whether or not it has made a relevant disposition of land in England and Wales since 28 February 2022.
Practitioners will recognise that the operation of the Register will be similar to that of the PSC Register already maintained at Companies House. However, the Register is broader in scope because it seeks to capture all legally identifiable overseas entities and will have a significant impact on the operation of the Land Registry in England and Wales and the Land Register of Scotland. In particular, all overseas entities are effectively prevented from dealing in UK real estate until they have received their overseas entity ID and most land (see below) already owned by an overseas entity will be subject to a restriction on title prohibiting disposal unless that overseas entity is on the Register.
All at (Over)sea
The Act has a very broad definition of “overseas entity”, being:
a legal entity that is governed by the law of a country or territory outside the United Kingdom
a legal entity being any a body corporate, partnership or other entity that (in each case) is a legal person under the law by which it is governed, (s2).
In effect this captures many of the corporate entities currently used in land investment, including Jersey companies, BVI companies and LLCs (whether or not tax transparent). The Act will therefore likely have wide implications for many of the overseas entities currently holding assets in the UK.
There are two further points to note:
- Unincorporated entities (which do not have a separate legal personality) are not caught by the Register. This may include unincorporated trusts and similar legal structures.
- The Secretary of State has a broad discretion to make certain overseas entities exempt (an “exempt overseas entity”) from publishing all or some of their information on the Register if it is “in the interests of national security” or “for the purposes of preventing or detecting serious crime”.
Cui Bono
So, who or what constitutes a beneficial owner for the purposes of the Register? In effect, the same criteria are applied as for the PSC Register, ie:
- the UBO holds, directly or indirectly, more than 25% of the shares or voting rights in the overseas entity;
- the UBO holds the right, directly or indirectly, to appoint or remove a majority of the board of directors;
- the UBO has the right to exercise, or actually exercises, significant influence or control over the overseas entity; or
- the UBO are 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 above.
The same exercise needs to be carried out as for PSCs, such that the beneficial ownership needs to be traced through any chain of corporate ownership or control to the ultimate source.
Again, overseas entities are expected to take reasonable steps to trace their UBOs, including serving an information notice on the suspected UBO, which the UBO then has one month to respond to. Failure to comply with a notice, or making a false statement, is a criminal offence, subject to penalties set out within the Act. The information will then need to be verified by one the relevant persons permitted to do so by the Regulations. If there is no UBO, or where the UBO cannot be identified or details obtained regarding them, details of the managing officers (i.e. directors or equivalent) of the entity should be provided instead.
The 20 Year Rule
As noted above, there is likely to be an ongoing impact on most if not all overseas entities who own land in the UK, as the requirement to register will affect all overseas entities which have acquired an interest in land on or since 1 January 1999. The Act is therefore retrospective in effect.
This will mean that after the grace period, overseas entities will not be able to dispose or otherwise deal with their UK land until they receive their overseas entity ID. A “disposal” of land is defined as; a transfer of a registered estate, a grant of a (leasehold) term of more than seven years where the estate is a registered estate in land, and the grant of a charge, e.g. to a bank so this will have day-to-day effects almost immediately for overseas entities.
If an overseas entity has disposed or property on or after 28 February 2022 then it must (unless it is exempt) provide the required information about the disposition and its beneficial ownership to Companies House by the end of the transitional period at the latest. Failing to provide the relevant information will constitute a criminal offence. An overseas entity should also disclose any dispositions made between the period of 28 February 2022 and the making of its application to the Register, in its application form.
Extra funding has been promised to Companies House to address this increased workload. However, concerns may be raised about the resources available to the Land Registry (who will need to deal with restrictions on title and registration matters) which already appears to be significantly over-taxed.
But Wait, There’s More
The UK Government have also used the Act to tack on other measures aimed at enhancing powers to combat financial crime:
Amendments to the enforcement process for Unexplained Wealth Orders (UWOs)
UWOs have been criticised since their introduction in 2018 as being fairly toothless. Few applications have been successful, and the manpower required from the National Crime Agency to enable them has not been forthcoming. The Act has made minor changes by allowing for enforcement against “specified responsible officers”, i.e. directors and senior officers of a targeted entity. It also allows the court to grant a UWO where there are “reasonable grounds for suspecting that the property has been obtained through unlawful conduct”. Further, enforcement agencies who apply for a UWO and are unsuccessful will see potential cost liabilities limited and can apply for an interim freezing order at the same time as applying for a UWO (which would prohibit the recipient of the UWO from selling property identified in the order).
Monetary penalties for the breach of financial sanctions legislation.
If the Treasury wishes to impose a fine on any person who has breached sanctions legislation, it will no longer have to consider the ‘state of mind’ of that individual in doing so. In effect, this becomes a matter of strict liability: if the Treasury is satisfied on the balance of probabilities that a person has breached sanctions, it may then go on to levy the penalty.
This seemingly minor change will likely have wider implications as it is likely to have a chilling effect on professionals who may through their work be implicated in sanctions-busting, lawyers being the inevitable example.
What does the Act do?
The UK Government, prior to publication of the new Act, stated that it expected an “immediate chilling effect” even due to the publication of the preceding draft Bill. However, it is hard to envisage the legislation having an immediate or dramatic effect on Russian-held wealth in the UK (not in the least because of the 6-month grace period allowed for registration). Indeed, as has been set out above, this is probably not the main intention of the Register.
Instead, we are likely to see a far wider set of consequences for the majority of overseas entities engaged in UK-centred transactions and not just in the real estate sector.
Real Estate
As noted above, publication of the Act (and subsequently the new Register) will likely add to the administrative burden of dealing with land transactions in the UK, not in the least during this initial period where overseas entities are all seeking their ‘overseas identity IDs’. This will lead to delays with overseas entities becoming the registered proprietors of land that they buy, or to delays. It will likely also cause delays and further compliance requirements in routine transactions, e.g. in the course of letting premises or in the course of property development. It may be expected that due diligence on an overseas entity’s compliance with the Register will form part of future transactions.
From an economic perspective, publication of the Act might lead to lesser investment in UK real estate from overseas to the extent that existing or new overseas entities withdraw from buying or holding UK land if they do not wish to engage with the new statutory regime.
Implications for Finance
The prohibition on dealing in land by unregistered overseas entities may hamper repayment of existing loans and the enforcement of the lender’s security over the property to secure repayment. Lenders are also prevented from registering new security, for example on a new loan or refinancing arrangement and the administrative burdens and delays referred to above may affect the course of charging transactions.
It is therefore likely that commercial lenders will impose stricter criteria, and potentially further enhanced due diligence on overseas entities to ensure that they have complied with the requirements of the Register. Loan Agreements may be ‘beefed up’ with further covenants in the same vein and there may be a move to amend existing loans to overseas entities.
Implications for Corporate Structuring
A straightforward M&A relating to an overseas entity will not be directly affected by the new regime as there will be no ‘disposal’ which would be registrable at the Land Registry. In fact, the sale of an incorporated overseas entity holding UK land may be an attractive way for a UBO to divest itself of its interests. However, it may be expected that any prudent buyer would require due diligence and suitable warranties on compliance with the Register. A buyer would also be responsible for updating the Register following completion of the deal.
More generally, the new regime may prompt a desire to change the existing ownership structures of overseas entities to avoid or mitigate the impact of this legislation. As with the regime for Persons with Significant Control, there are ways in which a transaction could be structured to avoid disclosure, and this may be a legitimate concern for many reasons for overseas investors.
