How will it work?
From 2021 it will require overseas entities to register with, and provide details of their beneficial owners to, Companies House before the overseas entity can be registered as the legal owner of UK land – whether commercial or residential. The register will be publicly accessible.
Which entities have to register?
Those entities which will have to register are those which are governed by the law of a country outside the UK and are legal persons under that governing law. That will include non-UK incorporated companies (even if the company is UK tax resident), non-UK LLPs and overseas partnerships in jurisdictions where they either have or can elect to have legal personality – Delaware and Luxembourg for example. Non-UK trusts that own UK land directly are not required to register (as the trust does not have a separate legal personality). The Government is consulting on Government/Public Authority exemptions. Future regulations may specify other exemptions but no information on what they might be is yet known.
Is this just relevant to land in England and Wales?
No - it applies UK-wide so includes Scotland and Northern Ireland though will apply there slightly differently due to their land registration regimes.
The Government has also signalled its intention that UK overseas territories introduce registers equivalent to the PSC (‘persons with significant control’) register for UK corporates - these include Bermuda, the BVI, the Cayman Islands and Gibraltar; but not Jersey, Guernsey and the Isle of Man. So the legislation’s main impact is likely to be on corporate entities owning UK real estate that aren’t subject to or don’t adopt beneficial ownership disclosure rules equivalent to the PSC regime – the US for example.
What does it mean for overseas entities that hold UK land before the legislation comes into force?
An overseas entity that is or becomes registered as the owner of UK real estate at Land Registry before the legislation comes into force will have 18 months from the date the legislation comes into force to become a registered overseas entity (or sell the asset, to avoid having to do so). If the overseas entity fails to do so then (unless it is exempt) it, and each of its officers, will commit a criminal offence.
What happens if an overseas entity fails to register?
If an overseas entity fails to register then:
- it cannot be registered at Land Registry on the purchase of a freehold property or a leasehold property (for a term of over 7 years in England and Wales) or on the grant of a lease for a term of over 7 years nor can a legal charge be registered against UK real estate it owns;
- a restriction will be placed on its title at Land Registry so that none of the above dispositions (purchase/charge/lease) by the overseas entity can be registered unless the disposal falls within certain exceptions. These are:
- where pursuant to a statutory obligation or a court order (such as statutory lease renewals);
- a contract entered into before the restriction was registered; and
- a disposal made by a lender exercising its power of sale (or by a receiver it appoints) to realise its security.
Initial proposals included making a title transfer to an overseas entity which had failed to register void – the draft legislation has dropped this draconian measure.
There is also an obligation to update the beneficial ownership information (or to confirm there has been no change) annually; the original proposals were to update this information every two years so this adds to the compliance burden on affected entities.
In practice, this means that if an overseas entity fails to register, or fails to comply with its duty to update annually that registration information, it will not be possible to register a sale/purchase, lease or legal charge at Land Registry.
Counterparties dealing with an overseas entity - whether sell or buy side, or in the letting or real estate financing context - will want to:
- know that the entity appears on the Companies House overseas beneficial ownership register; and
- seek contractual protection to ensure that entity adheres to its annual updating obligation (this will be key where there may be a significant interval before the transaction is completed).
It will be a criminal offence for both the overseas entity and each of its officers to make a disposition of UK land where it should be, and isn’t, on the beneficial ownership register, to fail to provide an update on the information on the register annually, or to deliver (or cause to be delivered) misleading, false or deceptive information to Companies House. It will therefore be essential that affected entities have appropriate compliance arrangements in place to ensure those obligations are met.
Who is a beneficial owner?
Beneficial owner has the same definition as for the PSC register, so those that are considered to have ‘significant influence or control’ over the overseas entity will be beneficial owners (for example, any person who holds more than 25% of the shares or voting rights or can otherwise exercise significant influence or control over it). An overseas entity is obliged to take steps to identify its beneficial owners and obtain the necessary information to make disclosure to Companies House. Ironically, the register will not identify in most cases the true beneficial owners of UK real estate (its intended aim); instead it will identify who has significant influence or control of the legal owner of the real estate asset. For example, it will identify the owner of a Luxembourg General Partner (as the registered owner at Land Registry), but not those holding the economic interest ie the other (limited) partners in that partnership.
It is disappointing that previous representations from us and others that some exception should be made for real estate joint venture corporate vehicles between a UK entity and an overseas entity were ignored. As a result real estate held in a JV vehicle could potentially not be realisable due to the action (or rather inaction) of the overseas entity; the documentation may not have countenanced that when the JV was set up.
How does an overseas entity apply for registration?
An overseas entity must apply to Companies House for registration – when it applies it must provide Companies House with specified information on the overseas entity and each of its registrable beneficial owners. For individuals, certain personal information will not then be made public (their residential address, for example).
The Government is consulting on elements of the draft legislation though it is unlikely much significant change will result; that consultation closes on 17 September. Revised draft legislation is expected to follow.