Enhancing the transparency of ownership of UK property
This regime targets overseas entities which transact in UK real estate. An overseas entity is defined as a company, partnership or other entity which is governed by the law of a country outside of the UK, and which has the status of a legal person under the laws of that country so can own property in its own right. Trusts are excluded from this definition since they do not have legal status, although Foundations will generally be covered.
The purpose of the regime is to increase transparency in the UK property market so as to tackle perceived corruption risks, and address the concern that UK property (and particularly, high-value London property) might present an opportunity for criminals to launder considerable sums of money.
The regime will apply across the UK; however, it applies differently in each of England and Wales, Northern Ireland and Scotland due to the three jurisdictions’ differing regimes for registering ownership of land.
The regime will require overseas entities to provide information on their beneficial ownership before they are able to purchase real estate in the UK. This information will be stored in a publicly available register, as with the UK’s existing regime for registering details of persons with significant control over companies and other entities (the “PSC” regime).
There is a proposal to extend the regime to overseas entities which participate in bidding for government contracts; however, this proposal has been shelved for the time being.
How will the regime operate?
The regime will apply to ownership of freehold land and leases which run for more than seven years (known as “qualifying estates”). It will apply equally to ownership of commercial and residential property.
An overseas entity will not be able to be registered as the proprietor of a qualifying estate unless it first registers details of itself and its beneficial owners with Companies House.
For the overseas entity, the information required to be registered will be: name; country of incorporation; registered or principal office; a service address; an email address; the legal form of the entity and the law by which it is governed; and any public register in which it is entered.
For an individual, the information required to be registered will be: name; address; date of birth; nationality; usual residential address; service address; and the nature of the beneficial ownership. The register will be available to the public, as with the PSC register, but individuals’ residential addresses and their "day" of birth will not be publicly available. Providing false information to Companies House is a criminal offence.
If the entity does not have any beneficial owners, or to the extent it cannot identify them or provide their details, it will still need to register and would instead provide details of its managing officers.
There is no requirement to disclose an indirect beneficial owner whose interest in the overseas entity is held through another entity which is itself subject to equivalent disclosure requirements (this is likely to apply to EU companies subject to the equivalent of the PSC regime).
If an overseas entity already holds a qualifying estate when the bill becomes law, the entity will have 18 months to either register with Companies House or dispose of the qualifying estate under a transitional regime for certain overseas entities. Failure to register will be a criminal offence.
By virtue of a restriction that will be lodged at the Land Registry, an overseas entity will not be able to sell, grant security or grant a lease for more than seven years over a qualifying estate unless the details of its beneficial owners are registered at Companies House.
The information provided to Companies House will need to be updated annually. Failure to update the information will also be a criminal offence.
Overseas entities can apply to be removed from the register if they cease to hold an interest in a qualifying estate.
A person is a “beneficial owner” of an overseas entity if one or more of the following conditions are met:
- holding (directly or indirectly) more than 25 per cent of the entity’s share capital;
- holding (directly or indirectly) more than 25 per cent of the entity’s voting rights;
- holding (directly or indirectly) the right to appoint or remove a majority of the entity’s directors; or
- exercising, or having the right to exercise, significant influence or control over the entity.
As with the PSC register, this test will be met by virtue of an indirect holding only where the individual owns a majority stake in the company that satisfies the relevant condition.
Where a trust or partnership is involved, a person will be a beneficial owner through the trust or partnership where:
- the trustees of a trust or members of a partnership, unincorporated association or other entity meet any of the above conditions (in their capacity as such); and
- the legal person has the right to exercise, or actually exercises, significant influence or control over the activities of that trust or entity.
As an example, a trust with professional trustees outside the UK which holds an overseas company which itself holds UK property will be covered by these provisions. Depending on the circumstances of the trust (e.g. whether the settlor or beneficiaries expressly have, or in practice exercise, certain powers), their details will need to be included as beneficial owners. Where there is no person who has those powers, the trustees themselves will need to be registered.
A share in an overseas entity held by a nominee is treated as if it were held by the beneficial owner. The draft bill does not distinguish between individual or corporate nominees; both will be caught by this provision.
Each overseas entity must take reasonable steps to identify any registrable beneficial owners. Entities will have powers (and an obligation) to send information notices to suspected beneficial owners, or people who may know the identity of beneficial owners.
These conditions mirror the conditions for beneficial ownership that currently exist under the UK’s PSC regime.
When will this be effective?
The Government has requested comments on the draft legislation by 17 September 2018. The Government expects to introduce the bill formally to Parliament in 2019. Following Royal Asset and the making of secondary legislation, it is intended that the register will become operational in 2021.
De-enveloping real estate
Historically, one benefit of holding UK real estate through an overseas entity was the ability to keep the ultimate ownership details anonymous. This allowed individuals with very real privacy concerns to avoid a public record of their wealth. The new regime means this will no longer be possible.
This regime, combined with the introduction of the Annual Tax on Enveloped Dwellings for residential UK property, and the subsequent removal of capital gains tax and inheritance tax advantages for foreign corporate owners of UK property, makes holding UK property through a non-UK company increasingly less attractive. It may therefore be advisable to remove the UK real estate from the overseas company. Advice should be taken on the “de-enveloping” process, as there may be significant costs associated with this action, particularly if the property is mortgaged or has increased in value since 2013.
Although the bill remains in draft form, it seems unlikely that the requirements will be significantly altered prior to the regime coming into force in 2021. The regime will have far-reaching effects for overseas entities holding UK property, and a review of corporate structures might be appropriate.
This note is intended only to summarise the key effects of the draft legislation and advice should be sought in relation to individual circumstances.