Sonal Shah
Ana-Maria Tomciac
It is perfectly legal for offshore entities to acquire UK properties and such schemes are generally structured for legitimate reasons. However, the Pandora papers as well as recent events have highlighted the vast misuse of illicit funds being invested in UK property, which are then effectively hidden behind corporate shells. For this reason, the Government pledged to introduce a register of overseas entities with the main scope to increase transparency and powers to tackle financial crime by revealing the identities of beneficial owners of UK property.
The register has been in public discussion for a number of years, but in light of the Russian invasion of Ukraine, it has been fast-tracked and brought onto the UK statute books to assist with the UK sanctions regime in relation to Russia.
The long-awaited register represents one of the three components contained in the Economic Crime (Transparency and Enforcement) Act 2022 which received Royal Assent on 15 March 2022.
What is the Register of Overseas Entities and what are the registration requirements?
The Register of Overseas Entities will be maintained at UK Companies House and will be publicly accessible.
All overseas entities owning UK property in England and Wales which meet the registration criteria must apply for registration and provide details of their beneficial owners.
To comply with the Economic Crime Act, the officers of overseas entities must take reasonable steps to:
- Identify any registerable beneficial owners of the entity;
- Deliver a statement about its registrable beneficial owners and provide the required information for that statement to Companies House;
- Complete an annual return on the Register of Overseas Entities to update the register;
- Request removal from the register at the appropriate time.
Once an entity registers on the Register of Overseas Entities, Companies House will notify the entity of the registration date and of their unique overseas entity ID.
What must also be highlighted here is that offshore entities that are planning on acquiring UK properties will have to register on the Register of Overseas Entities before such acquisitions. In that way, once the overseas entity ID is obtained, it will enable the respective entities to register their legal title to the property on HM Land Registry and, where they have borrowed purchase funds, for their lender to register a mortgage of the land.
Who will the registration requirements apply to?
The registration rules will apply to overseas entities that acquired a registrable property in England and Wales after 1 January 1999 or will acquire it in the future. There are corresponding provisions for property in Scotland and Northern Ireland, however, these are outside the scope of this article.
A registrable property, in this context, refers to a freehold estate in land, or a leasehold estate in land granted for a term of more than seven years from the date of grant.
An overseas entity, in this context, is broadly defined to include foreign companies, partnerships and other legal entities which are legal persons governed by the law of a country or territory outside the UK.
UK entities holding UK registrable property will not be caught by the Act as UK companies are already subject to the People with Significant Control (PSC) regime which requires disclosure of their beneficial owners.
What is also worth noting is that provisions of the Act were recently amended to specify the circumstances, albeit limited, when the Government can exempt entities from registering on the Register of Overseas Entities. For instance, entities may be exempt from registering if they provided beneficial ownership information to registers in their own jurisdictions and the government considers those registers to be equivalent to the UK Register of Overseas Entities.
In addition, the Government may, by giving written notice to a person, exempt them from registering if it is necessary to do so in the interests of national security, in the interest of the economic wellbeing of the UK, or for the purpose of preventing or detecting serious crime.
Who are the registerable beneficial owners?
The definition of a beneficial owner is similar to that used in the PSC regime. As such, a person will be a beneficial owner if they own more than 25% of the overseas entity's shares or can control more than 25% of its voting rights, or if they have the right to appoint or remove a majority of the board of directors or exercise significant influence or control over the overseas entity.
If the overseas entity's beneficial owner is another entity, then it must continue up the chain of ownership to disclose the beneficial owners. If there are no beneficial owners, it must include a statement from its managing officers (i.e. directors, managers or secretaries) including a description of their roles and responsibilities in relation to the overseas entity.
What are the implications for non-UK trusts?
Non-UK trusts do not have a separate legal personality and by default are not overseas entities. Thus, non-UK trusts that own UK land directly will not be caught by the new registration requirements. They will still be required to register on the UK’s Trust Registration Service (TRS) under the Fifth Money Laundering Directive.
Nevertheless, the information on non-UK trusts will be required to be provided where an application for registration as an overseas entity discloses that a registrable beneficial owner is a trustee. For instance, this would apply where an overseas structure includes both a trust and an overseas company, in which case the officers of that entity must ensure that it is registered.
In this case, the application must include information about the trust, such as: the name; the date of the trust’s creation; details of the settlor, grantor, beneficiaries and other interested persons (i.e. name, date of birth, nationality, usual residential address, service address).
What are the deadlines to register on the Overseas Entity Register?
The original Bill required overseas entities to apply to register as an overseas entity within 18 months of the date of commencement. However, the transition period has now been reduced to 6 months from the date of commencement. We are yet to be informed of the commencement date, although a prompt response is expected from the Government given the significance of such Act.
In addition, an overseas entity must also state whether or not it has made any relevant disposals of registrable land since 28 February 2022. If there has been a relevant disposal, the overseas entity must provide to Companies House the information which would normally be required on registration on the Register of Overseas Entities, together with information on the disposition such as the date of sale and the title number. This must be done within the 6-month transitional period either as part of the application for registration or separately if the entity does not need to register.
What are the consequences of not complying with the Act?
Foreign entities that do not comply with the registration requirements will be unable to deal with UK land. For instance, in absence of an overseas entity ID they will not be able to register the land with the HM Land Registry unless the entity is exempt from registering on the Overseas Entity Register. As a result of this, the buyer will also be unable to further dispose of its interest in such land.
Failure to comply with such Act will also be deemed a criminal offence for the overseas entity and its officers, which could result in facing unlimited fines or up to 5 years in prison, depending on the severity of the breach.
Therefore, all current and prospective overseas owners of registrable UK land must be aware of these provisions of the Act.
Companies House are still working towards implementing the register as quickly as possible whilst liaising with the UK’s land registries. We have yet to see how the Overseas Entity Register will operate and await further news from the Government.
What must be noted here is that the register does provide some wiggle room in the event there are multiple owners with less than 25% shareholding or voting powers; hence are able to circumvent the disclosure requirements. Another deficiency is that the register mainly focuses on overseas entities which hold the land rather than the beneficial owners of the land in question. The question here is whether the register will be sufficient to tackle financial crime.
The good news is that the register of overseas entities is just a single measure forming part of a wider scheme to tackle and prevent using illicit funds in the UK. The Act also amends the financial sanctions law and reforms the UK’s Unexplained Wealth Orders to empower criminal investigators. We, therefore, look forward to seeing how these reforms will apply in practice.
XLNC ARCHIVE |29 April 2022