Four years ago, the first draft legislation concerning the Overseas Entities Register (“the Register”) was published to very little fanfare. However, motivated by a push to crack down on Russian hidden wealth, the Register has now been brought into effect by the Economic Crime (Transparency and Enforcement) Act 2022 (”the Act”), which was rushed through Parliament in a matter of weeks and received royal assent on 15 March this year.
Whilst the motivation behind the Act is to target offshore entities that have been used for money laundering purposes, as is often the case with this type of legislation, the effects are far-reaching. There are a number of tax mitigation reasons why individuals historically used an offshore company to purchase UK residential property, which have largely been eroded over time. There are still however good reasons to continue to own UK commercial property in such a structure, including Inheritance Tax protection for non-UK domiciled individuals.
The Overseas Entities Register
The Act establishes a register for the public disclosure of overseas entities (and their beneficial owners) that own UK real estate (both residential and non-residential). The purpose is to “deliver transparency about who ultimately owns and controls overseas entities that own land in the UK”. Penalties can be imposed under the Act for non-compliance in the form of a fine or even a custodial sentence. In addition, there will be a significant impact on overseas entities’ ability to buy and sell UK real estate as they will first have to declare their beneficial ownership and comply with the reporting requirements introduced by the Act.
All legally identifiable overseas entities that hold or intend to hold an interest in land (a freehold interest or a long lease of more than 7 years) will have to take reasonable steps to identify their beneficial owners and provide verified information about them. For those already familiar with the PSC (Persons with Significant Control) Register, the new measures follow similar terms. The Register will be maintained by Companies House, who in the Autumn Budget were promised £63 million of fresh funding to assist with getting the Register operational.
The information to be publicly disclosed on the Register will include:
- The beneficial owner’s name, nationality and service address. Their date of birth and residential address will be provided to Companies House but not actually published unless they have “functions of a public nature”.
- Details of the managing officers (i.e. directors or equivalent) of the entity; and
- Details of the entity itself, including its name, country of formation, legal form and registered address.
In a slight change to the previous drafting, there is now the requirement that the roles and responsibilities of the managing officers in relation to the entity be disclosed.
There will be an 18-month grace period from 15 March 2022 for the affected entities to register.
What is considered an “overseas entity”?
The Act defines an “overseas entity” as a legal entity that is governed by the law of a country or territory outside the UK. “Legal entity” is defined as a body corporate, partnership or other entity that (in each case) is a legal person under the law by which it is governed.
This definition importantly excludes trusts that do not have legal personality under the laws by which they are governed, for example, a discretionary offshore trust governed by the laws of England and Wales. Instead of appearing on the Register, the recently expanded Trusts Register, (in theory) fills this gap by requiring offshore trustees that acquire UK real estate after 6 October 2020 to register their trusts on what is, conversely, not a public register.
Where an offshore trust (with legal personality) such as a US trust owns UK real estate via an offshore entity, this will fall into the ambit of the Register. However, if that trust is entirely discretionary, then it is unlikely to have any “registrable beneficial owners” to report.
Who will be considered a “beneficial owner”?
Generally, and mirroring the language under the PSC register, a beneficial owner needs to be registered if they hold more than 25% of the shares or voting rights in an entity; can appoint or remove a majority of its directors; or have some other significant influence or control over it (including through a trust or partnership structure). Where no such person meets this standard for beneficial ownership, the entity will still be required to register but will provide a statement that the entity has “no reasonable cause to believe that it has any registrable beneficial owners”.
Overseas entities will have an ongoing requirement to keep this information under review, and if there is a change, for example a new person acquires a controlling share in the company, then it will need to update the Register within 14 days.
How retrospective is retrospective?
The Register is retrospective as it requires existing overseas entities that own UK real estate to register (within the 18-month grace period). There is a limit however to how far back the Register will look. Those entities that acquired their interest in UK real estate prior to 1 January 1999 will not be required to register (unless of course they acquire a further interest).
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, issued to them by Companies House.
The impact for private clients
Through a series of tax reforms, including the introduction of ATED and Capital Gains Tax on non-resident owners, the tax advantages of owning UK real estate via offshore companies have diminished, but the privacy protection it afforded meant it remained an attractive option for many high net worth individuals. A common technique where privacy alone was the driving factor in a transaction was to purchase a UK residential property in the name of an offshore nominee company. This resulted in the same tax consequences as if the individual purchased the property (meaning HMRC was aware of the identity of the beneficial owner) but meant the individual owner’s identity was not publicly disclosed on the Land Register. However, nominee (or ‘bare trust’) arrangements such as these are now captured by the Trusts Register, and so where the nominee acquired the property interest on or after 6 October 2020, they will be required to register by September this year.
Wealthy individuals often have legitimate reasons for wanting to keep their home addresses private. They are often the targets of financial crime/fraud, burglary and even kidnapping. Having a significant stake in a business increases the risk of disgruntled employees, competitors and shareholders. There is also the issue of unwanted and persistent press attention/harassment, which can be particularly unpalatable when directed towards young family members.
Many have questioned whether the Register will actually have any impact on the publicised targets (i.e. the Russian oligarchs owning UK property) due to how long it has taken for it to be brought into effect, and not to mention the 18-month grace period in which the assets can be liquidated and the wealth moved offshore.
In any event, anyone who owns or administers an offshore entity that owns UK land will need to ensure compliance with this new regime. Please contact Dhana Sabanathan or James Gribbin for further information.
