By Alex Ruffel, Josh Fowler and Yousafa Hazara

The UK government passed the Economic Crime (Transparency and Enforcement) Act (the Act) on 15 March 2022. The Act introduces a public register of beneficial ownership of UK property held by non-UK companies and similar entities. 

Who needs to be aware of the Act?

Those who may to be affected by the new law and should understand its implications include:

• non-UK companies that own UK real property and their shareholders and officers;
• non-UK corporate trustees holding UK real property directly or indirectly;
• settlors, protectors and beneficiaries of non-UK trusts that hold UK real property directly or indirectly;
• foundations that hold UK real property and their founders, board members and beneficiaries; and
• non-UK partnerships that hold UK real property.

What is the background to the Act and what are the Government’s objectives?

A public register for overseas corporate owners of UK property was originally proposed in 2016 and a draft Registration of Overseas Entities Bill was published in July 2018 but was never enacted. At least in part in response to the invasion of Ukraine by Russia and the sanctions imposed by the UK government, the Act was redrafted and pushed through the legislative process at great speed.

The Government hopes the Act will “crack down on foreign criminals using UK property to launder money [and] ensure criminals cannot hide behind secretive chains of shell companies”.

The register accompanies other transparency and enforcement initiatives, including the People with Significant Control (PSC) regime, the Trust Registration Service (TRS), suspicious activity reports and unexplained wealth orders.  

What are the new rules under the Act?

In broad terms, the Act will require overseas companies or similar entities that are the registered proprietors of UK residential or commercial property to investigate and provide details of their beneficial owners and/or those who control them to UK Companies House. The information will appear on a register that will, for the most part, be publicly accessible.

Which overseas entities are caught?

There are three requirements that must all be met for registration to be necessary:

1. There must be an “entity”. This means that the body in question must be regarded as a legal person under the law by which it is governed. Limited companies and some partnerships will be entities for these purposes;
2. The entity must be “overseas”. This means it must be governed by the law of a country or territory outside the UK; and
3. The entity must be the registered proprietor of UK real property, whether residential or commercial (i.e. the entity’s name must be on the title of the property at the UK Land Registry). In England and Wales, the registration requirements apply where the interest that is owned is a freehold estate or leasehold estates granted for a term of more than seven years defined in the Act as “qualifying estates”. The criteria differ in Scotland and Northern Ireland. Only overseas entities that have been registered as the proprietor of a qualifying estate on or after 1 January 1999 will be caught. The register does not apply to UK real property registered in the name of an overseas entity before that date.

Are trusts and foundations overseas entities for the purposes of the Act?

Trusts are not covered by the definition of “overseas entities” since they do not have legal personality and cannot directly hold land.  However, trusts that hold UK land may do so through a non-UK company and that company itself will probably be an overseas entity that must register and may be required to provide details of individuals associated with the trust.

Foundations are likely to be caught because they are usually considered to have legal personality in the country whose laws govern them.

What details will need to be provided for the purposes of the register?

Overseas entities that are caught by the new rules will have to apply to Companies House to register as an overseas entity and provide certain details to the registrar.

As far as the overseas entity is concerned, the information required will include:

1. name;
2. country of incorporation;
3. registered or principal office;
4. a service address;
5. an email address;
6. the legal form of the entity and the law by which it is governed;
7. any public register in which it is entered and, if applicable, and
8. its registration number in that register.

The overseas entity will also need to take “reasonable steps” to identify its beneficial owners (as to the meaning of which see below). For each beneficial owner, the requisite information will include:

1. name;
2. address;
3. date of birth;
4. nationality;
5. usual residential address;
6. service address; and
7. the date on which the individual became a registrable beneficial owner in relation to the overseas entity

The application will need to be accompanied by a statement that the overseas entity has identified one or more registrable beneficial owners and that it has no reasonable cause to believe there are other beneficial owners.

Where a registrable beneficial owner is acting as a trustee of a trust (or an equivalent arrangement that under its governing law is of a similar character to a trust), the overseas entity must also provide information about the trust itself, including:

1. the name of the trust or, if it does not have a name, a description by which it may be identified;
2. the date on which the trust was created;
3. in relation to each person who has at any time been a registrable beneficial owner in relation to the overseas entity by virtue of being a trustee of the trust:
   1. the person’s name,
   2. the date on which the person became a registrable beneficial owner in that capacity, and
   3. if relevant, the date on which the person ceased to be a registrable beneficial owner in that capacity;
4. in relation to each beneficiary, settlor, and any other person who has the power to appoint/remove trustees under the trust:
   1. name;
   2. date of birth;
   3. nationality; and
   4. address.

Will all information provided be publicly accessible?

The register will be accessible, probably online, to the public but individuals’ residential addresses and their full date of birth will not be publicly available.

As far as information submitted in respect of trusts is concerned (i.e. where the registrable beneficial owner of an overseas entity is the trustee of a trust), this information will also not be made public, although will be available to tax authorities.

Who is regarded as a “beneficial owner” of an overseas entity? 

At the crux of the register is the question of who or what constitutes a “beneficial owner” of an overseas entity holding registrable land. All beneficial owners are “registerable beneficial owners” unless they are exempt from registering as discussed below.

Beneficial owners may include individuals, governments and public authorities or other legal entities that meet one or more of the following five conditions:

1. Ownership of shares - they hold, directly or indirectly, more than 25% of the shares in the entity. Note: where shares in an overseas entity are held by a nominee, the shares will be treated as if they were held by the beneficial owner;
2. Voting rights - they hold, directly or indirectly, more than 25% of the voting rights in the entity;
3. Right to appoint or remove directors - they hold the right, directly or indirectly, to appoint or remove a majority of the board of directors of the entity;
4. Significant influence or control - they have the right to exercise, or actually exercise, significant influence or control over the entity; and
5. In respect of trusts, partnerships and other entities without legal personality - if the trustees of a trust, or the members of a partnership, unincorporated association or other entity meet any of the conditions specified above, a beneficial owner will include anyone who is able to exercise, or actually exercises, significant influence or control over the activities of that trust or entity.

Conditions 1 to 3 refer to a person being a beneficial owner if they hold a share or a right “indirectly”, as well as directly. 

A person/entity holds a share or right indirectly if they hold the majority stake in a legal entity which holds the share or right itself they hold a majority stake in a legal entity that is part of a chain of legal entities, each holding a majority stake in the entity below, and the last entity in the chain holds the share or right.

In this context, a person or entity has a majority stake in a legal entity of they hold a majority of the voting rights, hold shares in the entity and can appoint or remove a majority of its directors and has the right to exercise or actually exercises “dominant influence or control” over the entity.

This means, practically, when identifying its relevant beneficial owners the overseas entity must work up through every layer of its chain of ownership and register the required information for each relevant person. It may not be sufficient to stop at the first identifiable registrable beneficial owner.

“Exercising significant influence or control” (let alone “dominant influence or control”) is not defined in the Act and there has not been guidance released confirming this. The identical phrase is used in the PSC register so, in the absence of further guidance, we assume that its meaning will align with that used in the context of the PSC register.

If you are unsure as to whether your overseas entity is caught by the Act and the extent of the information that will require disclosure, you may wish to refer to the examples given below.

Are there any exemptions to the obligation to disclose a beneficial owner?

Where a person has indirect ownership of the overseas entity (for example through a company or a chain of companies) and their details are already being disclosed because of their connection with the company or chain (for example in relation to the PSC), they will not have to register again under the Act.

The Secretary of State can also make provision for an overseas entity to be exempt from registration on the basis of national security.

What if the overseas entity has no identifiable beneficial owner?

If an overseas entity is not able to provide the beneficial ownership information because there are no beneficial owners falling within the categories described above, it will need to provide information about its ‘managing officers’, who will include directors, managers and secretaries.

If, upon reasonable inspection, the overseas entity has been unable to identify any beneficial owners, the entity will upon application need to submit a statement to Companies House to that effect.

What are the timescales to register and what is the transitional period?

The deadline for registration is six months from the commencement date of the relevant parts of the Act. This period of six months is referred to as the “transitional period”.

We do not yet know when the transitional period will start and therefore do not know the deadline for registration. 

What are the consequences of failing to register?

The Act states that individuals who try to sell or lease property without first publicly declaring its beneficial owner may face potential imprisonment and daily fines of up to £2,500 for each day on which they continue to fail to make an application to register. It will be an offence to deliver misleading, false or deceptive material to the registrar or deliver false, misleading, deceptive statement.

Failure to register and update the beneficial ownership register at Companies House will also be punishable with imprisonment and fines. There is a requirement to update the register every 12 months. The update must be provided within 14 days of each 12-month anniversary of the initial registration.

In addition to criminal penalties for non-compliance, the Act provides that a failure to register, or to comply with the updating requirements, will result in:

a. an overseas entity being unable to register as a proprietor of land in the UK at the Land Registry; and

b. certain dispositions made by an overseas entity registered proprietor being incapable of registration at the Land Registry. In practice this means that a failure to register, or to comply with the updating duty, will in most cases affect the ability of the entity to either sell or lease the land, or create a charge over it.

How, in practice, will the Act prevent an overseas entity from disposing of its property?

The Act provides that during the transition period the Land Registry (which manages and controls the register of ownership of all UK property) must put a restriction on land owned by an overseas entity that will limit the ability of the overseas entity to deal with the land unless it is registered, except in very specific circumstances.  The restriction will have effect when the transitional period ends.

What happens to dispositions of property during the transitional period?

If an overseas entity disposes of registrable land between 28 February 2022 and the end of the transitional period, it will need to give details of the identity of its beneficial owners as they were immediately before the disposition.

This means that even if a restriction has not yet been entered against the registered title, the overseas entity will still be required to reveal the identity of its beneficial owners. This change was included to prevent a quick sale by the overseas entity that may attempt to circumvent the register.

How does the new register interact with the Trust Reporting Service

It is possible that trusts will be required to register twice (once with Companies House and once under the TRS) if they fall under both. It is likely that non-UK resident corporate trustees who acquire UK land directly will not only be required to register with Companies House and also under the TRS (although the latter registration will not be public). This will result in double registration and an additional administrative burden for trustees.

What will the long-term impact of the Act be?

The long-term impact of the new Act remains to be seen. According to Land Registry data, there were around 97,000 properties in England and Wales which were held by overseas entities in January 2018. It will be interesting to see whether the new register will deter individuals from owning UK land via an overseas entity or whether it will merely be an extra administrative burden for corporate entities, Companies House, the Land Registry and legal professionals.

Examples

If you are unsure as to whether your overseas entity is caught by the Act and the extent of the information that will require disclosure, click here to see examples of the registration and reporting requirements in respect of common structures involving UK property owned by nominees and in more complex trust structures.

If you have any questions regarding the proposed new register or would like to discuss in detail about how the rules will impact you, please contact Alex Ruffel, Josh Fowler or Yousafa Hazara.

The note is for general information only and does not constitute legal or tax advice on which you can rely.  We would be pleased to assist if you require advice about your own or your clients’ affairs or particular circumstances.