Due to recent events in Ukraine, the UK government has taken the unusual step of expediting the introduction of new legislation which seeks to make the ownership of land and property in the UK more transparent. Previously, property could be owned by an offshore company or trust, and the beneficial owners could remain anonymous.
It will soon be a legal requirement that all beneficial owners must disclose their identity on a new register of owners to be kept at Companies House. Failure to comply could result in criminal sanctions including a prison sentence up to 5 years and fines of up to £2,500 per day.
From a practical point of view, failing to comply with the register will severely limit what can be done with the property: it cannot be sold, remortgaged or in any other way disposed of because HM Land Registry will not register the transaction.
It is imperative that owners of property in the UK held via an offshore company seek to immediately protect themselves by seeking legal advice. At Bishop & Sewell we can provide support to ensure the registration process is easily dealt with in a compliant manner and we can also offer further options as to the ownership of property.
On 15th March, following an expedited passage through Parliament due to the conflict in Ukraine, the Economic Crime (Transparency and Enforcement) Act 2022 (ECA) received Royal Assent. While the ECA deals with reforms to Unexplained Wealth Orders, of main concern to us here at Bishop & Sewell is the impact the new regime will have on land ownership.
The ECA substantially incorporates the draft Registration of Overseas Entities Bill which was being floated for a few years, but always seemed to be pushed down the legislative agenda. The idea was (and now is) to make the ownership of land in the UK more transparent.
In summary, the ECA introduces a new public register at Companies House; all overseas entities that either owns, or wishes to own, UK land will need to identify their beneficial owner(s) and to register them on that register. The ECA also imposes a duty on overseas entities to update the register annually.
In the ECA, an Overseas Entity is defined as (in broad terms) any legal entity that is governed by the law of a country or territory outside the United Kingdom. This could affect Companies, trusts and other legal constructs the people can use to hold assets.
Beneficial Owners are defined by the ECA if any of the following apply:
A. X holds, directly or indirectly, more than 25% of the shares in Y.
B. X holds, directly or indirectly, more than 25% of the voting rights in Y.
C. X holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of Y.
D. X has the right to exercise, or actually exercises, significant influence or control over Y.
E. Trusts, partnerships, etc
i. 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 specified above (in their capacity as such) in relation to Y, and;
ii. X has the right to exercise, or actually exercises, significant influence or control over the activities of that trust or entity.
If an overseas entity does not comply with the new obligations, its managing officers can face criminal sanctions, including fines of up to £2,500 per day or a prison sentence of up to 5 years.
HM Land Registry will also not register overseas entities as owners of UK property unless they have registered the beneficial ownership at Companies House and received the associated ID number. Overseas entities will also be prevented by HMLR from selling, mortgaging or granting long leases of their properties unless they have complied with the new requirements.
For re-financing transactions involving an overseas element, we are likely to see the inclusion of additional Conditions Precedent, as well as representations and undertakings, being demanded by lenders and other financial institutions.
Guidance from government and regulators regarding how and when entities should report is likely to be published imminently, and relevant enforcing bodies will no doubt put in place the necessary steps to comply.
Given the speed in which the ECA was pushed through, further guidance from government and regulators regarding how and when entities should report has not yet been finalised – and only time will tell just how Companies House and Land Registry will cope with this change in process.
Any overseas entities that wish to continue dealing in UK real estate would be well advised to start getting their papers in order now. That way they can make their registration application the moment the register is in order. Ignoring the potential sanctions of not complying with the new regime (which are serious in of themselves) it would be an additional burden to attempt to deal with the registration process in the middle of a conveyancing transaction.
If you are affected by this article, or you have any questions regarding your existing property or corporate structure, please call 020 7631 4141 and ask for a member of the Property team or email firstname.lastname@example.org.
This article is intended as a general summary on the law – no reliance should be placed on it.