Background
It is fair to say that the Overseas Entities Register ('the Register') has had a long gestation period. It was originally announced by Prime Minister David Cameron as part of the May 2016 Anti-Corruption Summit in London. This started a consultation process and in July 2018 a draft Bill was published setting out the scope of the proposed register – it was also proposed that the register would be operational in 2021 (although this did not happen). Details of the draft Bill are set out in the following article, which we published last year: UK Real-Estate and the Register of Foreign Owners: new registration requirements.
After very little action, the Register was finally back on the political radar in early 2022 and progressed at pace in March 2022. The legislation bringing the Register into force (The Economic Crime (Transparency and Enforcement) Act 2022 ('the Act')) sailed through the Parliamentary process receiving Royal Asset in the early hours of 15 March 2022, just two weeks after its first reading in the House of Commons.
There is probably no need to explain what was behind the political will to suddenly prioritise this legislation. However, the Register applies to all overseas entities (not just those linked to Russia or suspected money laundering) and so the increased compliance burden will be felt by all foreign corporate owners of UK property regardless of their size, shape or purpose. The Register does not, for instance, just catch high value residential or London property and there is no monetary or other threshold.
Much of the content of the 2018 draft legislation remains the same, but there have been some important changes for properties which were already owned by foreign entities and for foreign entities which are owned as part of a trust. Importantly, for foreign entities who already own UK real estate the timeline for complying has been cut from 18 months to six months.
The Act also deals with other important provisions in relation to unexplained wealth orders and sanctions, but these are not considered further in this article.
It is worth noting that the provisions which bring the Register into law are not yet in force and they will require separate regulations to bring them into force. It is expected that the provisions will be implemented as soon as Companies House and the Land Registries in England & Wales, Scotland and Northern Ireland have systems in place to allow the reporting and enforcement of the provisions introduced by the Act. However, no doubt there will be a strong push to get these systems in place as soon as possible.
Who does this impact?
In short the Register applies to:
- Overseas entities (being a non-UK registered body with legal personality under the law by which it is governed). An obvious legal person which meets this test would be any non-UK company (this includes non-UK incorporated companies which are UK tax resident). The provisions also catch partnerships and any other entity governed by the law of a country outside of the UK which is a legal person under those laws
That either
- owned an interest in UK property on 28 February 2022. For interests in property in England and Wales this property interest must also have been registered on or after 1 January 1999. For interests in property in Scotland this property interest must have been registered on or after 8 December 2014 (the Act only applies prospectively to property owned in Northern Ireland)
or
- acquire an interest in UK property after 28 February 2022.
This is an important change from the draft 2018 legislation as under that legislation there was the option of the overseas entity selling land it owned before the end of the transitional period (this was originally to be 18 months from the date the legislation entered into force, but the time period has been cut to six months).
This option of selling rather than reporting has now been removed by the Act and any overseas entity owning land on or after 28 February 2022 will need to provide information on the Register regardless of whether they sell the land before the end of the transitional period without needing to report. The transitional period was also originally to be 18 months from the date the legislation entered into force, but the time period has been cut to six months.
Who counts as a beneficial owner?
The Register adopts the same definition of control that governs inclusion under the register of Persons with Significant Control ('the PSC Regime') that currently exists for UK companies.
In this regard, the reporting is only looking at the beneficial owner of the overseas entity (and not necessarily the beneficial owner of the property owned by the overseas entity).
Beneficial Owners of the overseas entity are persons who:
- hold directly or indirectly more than 25 per cent of the shares of the entity; or
- hold directly or indirectly more than 25 per cent of the voting rights of the entity; or
- hold directly or indirectly the right to appoint or remove a majority of directors of the entity; or
- have the right to exercise or actually exercise significant influence or control over the entity; or
- have the right to exercise or actually exercise significant influence or control over an entity which is not a legal person under the law of that jurisdiction (i.e. a trust, partnership or unincorporated association) which meets any of the tests above.
Generally speaking, as with the PSC Regime, the Beneficial Owners will either be individuals (i.e. the individual or individuals who are the ultimate owners looking through a corporate structure) or Legal Entities which are themselves required to report their beneficial owners (either under the UK’s PSC regime, the Register or another publicly available register which discloses beneficial ownership of entities).
What information needs to be provided to the Registrar?
The following information will need to be reported in relation to an individual beneficial owner:
- name, date of birth and nationality;
- usual residential address;
- a service address;
- the date on which the individual became a registrable beneficial owner in relation to the overseas entity;
- confirmation of which of the conditions for beneficial ownership is met in relation to the individual;
- whether the individual meets the condition by virtue of being a trustee; and
- whether the individual is subject to financial sanctions under the Sanctions and Anti Money Laundering Act 2018.
More information needs to be provided to the Registrar than is publicly available. For instance, the residential address and the day of birth (as opposed to the month and year) will not normally be on the public register.
If a beneficial owner is the trustee of a trust then extensive information also needs to be disclosed to the Registrar about the trust. This includes:
- the name of the trust;
- the date on which the trust was created;
- the trustees’ names and date/s on which they became a registrable beneficial owner of the overseas entity as trustee;
- the information required in relation to an individual beneficial owner for all beneficiaries;
- the information required in relation to an individual beneficial owner for each settlor/grantor; and
- the information required in relation to an individual beneficial owner for any person who, under the terms of the trust, has rights in respect of—
- the appointment or removal of trustees; or
- the exercise by the trustees of their functions.
Importantly, this information (in relation to the trust) is not publicly available, although it will be made available to HMRC and other persons as specified in future regulations made the Secretary of State.
It is likely that HMRC will use the information about trusts to ensure that reporting is also being undertaken and kept up to date (where necessary) on the UK Trusts Register.
When do overseas entities need to report by?
For overseas entities that already own UK property or acquire it before the act comes into force, the first reporting date will be by the end of the transitional period of six months from when the Register comes into force. This will apply regardless of whether the overseas entity owns the land at the end of the transitional period.
For future purchases after the date the Register comes into force, it will not be possible for an overseas entity to be registered as the proprietor of land without first reporting on the Register.
How often will overseas entities need to update the information?
The information will need to be updated annually within 14 days after the end of the ‘update period’. The ‘update period’ is 12 months beginning with the date of the entity’s first registration.
Entities will need to either provide updated information if the information has changed or to confirm that it is up-to-date if it has not.
What about beneficial ownership of the property?
It is clear that the Register is focussed on looking at beneficial ownership of the entity and not beneficial ownership of the property.
As a result, there are some scenarios where it is likely that true beneficial ownership of the property/ies owned by the entity will not be reported on the Register.
Suppose that an overseas company (the 'Nominee Company') owns five UK properties under five separate nominee agreements for five unconnected individuals (the 'Beneficial Owners').
The shares in the Nominee Company are owned by another individual who is unconnected to the Beneficial Owners ('Person X') and Person X is also the director of the Nominee Company and the shares in the Nominee Company are not held in any trust structure.
The only beneficial ownership information to be reported to the Registrar in relation to the Nominee Company appears to be information in relation to Person X and not any of the Beneficial Owners. The Beneficial Owners are the true owners of the five properties, but not of the Nominee Company.
Where an overseas company holds property as nominee for one person then there appears to be a strong argument that the beneficial owner under that nominee arrangement meets the significant influence and control test for beneficial ownership. It seems likely that they meet condition 4 as they have the right to exercise or actually exercise significant influence or control over the entity given that the beneficial owner can direct the entity in relation to how it uses its sole asset. However, where an overseas entity is nominee of multiple properties under multiple nominee agreements then this conclusion seems much more difficult to reach.
Arguably, this is where the Trusts Register will fill in the gaps (certainly for properties acquired after 6 October 2020) as these nominee agreements should be registered on the UK Trusts Register. The same also applies for corporate trustees holding UK property as trustee (not as a nominee). However, it is certainly fair to point out that the two registers are not the same. The Trusts Register is not (for now) public. In addition, the consequences for failure to register on the Trusts Register are not similar to failure to comply under the Overseas Entities Register where failure to report can lead to criminal sanctions (fines or imprisonment) and an inability to sell the UK property that is owned.
These limitations in the Overseas Entities Register appear to be acknowledged by Parliament and it would not be surprising if further amendments were made in due course to address them and allow for reporting of beneficial ownership of the property itself.
What should overseas entities be doing now?
Under the Act, overseas entities must take reasonable steps to identify their "registrable beneficial owners", obtain the information about them specified in the legislation and report this on the Register.
Before registering, the overseas entity must take reasonable steps to identify its beneficial owners. In many instances, this identification process may be easy. However, if information about beneficial ownership is not known then the overseas entity must send an information notice to any person that it knows, or has reasonable cause to believe, is a registrable beneficial owner to request the information. Failure by an individual to comply with the request under an information notice is a criminal offence, punishable by a fine or imprisonment.
As discussed, the Register is not yet live and a timeline for making it live has not yet been confirmed. However, one can expect this to happen as soon as possible. From that date, overseas entities will have just six months to report their information on the Register and failure to do so will be a criminal offence punishable by fines and potentially imprisonment. In addition, this will result in the inability to sell, mortgage or grant leases (of over 7 years in England & Wales or over 21 years in Scotland and Northern Ireland) of the property as a result of a restriction placed on the UK land registries. In practice no well advised buyer, lender or tenant will enter a UK real estate transaction with an overseas entity unless assured that the entity has complied with the Act.
As a result, all overseas entities who are affected would be well advised to start by considering their beneficial ownership and collating what information they will need on their beneficial owners in order to comply with the terms of the Act.
How involved a process this will be will no doubt vary from structure to structure, but it will be important for all overseas entities to take appropriate steps as soon as possible to ascertain their beneficial owners and all information that is required to be submitted.
How we can help
We have extensive experience assisting overseas entities with their UK tax structuring and reporting obligations in the UK.
The exact scope of the reporting process is still unclear as the detail of how the Register will be run has not yet been released. However, we would be more than happy to assist any clients with reviewing their structures or reviewing beneficial ownership to ascertain the impact and what information is required (including assisting with obtaining this information) in order to report on the Register.
If you or your client would like further guidance then please contact Emma Heelis-Adams.