Legislation for a new register for overseas entities with UK land or property and their beneficial owners was passed by Parliament on 14 March 2022. It will have huge implications for anybody managing an overseas entity that owns UK property or wants to buy or sell UK property. In turn, it will create complications for anybody in the UK who wants to transact with an overseas entity. The sting in the tail is the reduced transitional period from 18 to 6 months. 14th September is now the deadline for overseas entities with UK property to complete their registration requirements.
Unless the overseas entity is on the new register it should not be able to register any land transaction with the Land Registry be it a sale, purchase or lease renewal. Moreover, the directors of the overseas entity could face financial penalties or a prison sentence for failing to register or entering into a transaction before registering.
Whilst the legislation currently requires registration, as noted below, it is not actually possible to register yet. Until the registration system is in place, the Land Registry will not be able to prohibit the disposal. Consequently, an overseas entity could sell UK property before 14th September but this does not mean that there is no requirement to register.
What is behind the register?
The new legislation is part of the Economic Crime (Transparency and Enforcement) Bill. The drive for the new register is part of the strategy for defeating money laundering and intercepting the proceeds of crime. We are all familiar with the anti-money laundering regulations and the bureaucracy it creates in everyday business; it is a fact of life. The same will be true of the new register but, as with the anti-money laundering laws, there are serious consequences to getting things wrong.
Who needs to register what?
The new register will be run by Companies House; as of today’s date, their website says “we’re working at pace to make sure this is implemented as soon as possible…”. Any entity such as a body corporate, partnership or other legal person, that is governed by the law of a country or territory outside the UK is an overseas entity for these purposes. Where an overseas entity owns property in the UK it must register and disclose details of its registrable beneficial owners. A beneficial owner is any person who has:
- More than 25% of the entity’s shares
- More than 25% of the voting rights over the entity
- The right to appoint or remove directors, or
- The right to or exercises significant influence or control over the entity
Where a trust or partnership meets the criteria, the beneficial owner includes anybody who can influence or control the trust or partnership.
This is not as straightforward as the criteria above suggest and the legislation, as drafted, may not produce the intended result. Where the share capital of a non-UK resident company is held in a non-UK resident discretionary trust, it is the trustees that meet, what is effectively, the person of significant control tests set out in the legislation. On this basis, an offshore trustee company would be the registrable beneficial owner; the trust it manages will go unnamed. This will not be the case, however, where an individual is able to exercise control or exert significant influence over the trustees. In this case, the individual will become the registrable beneficial owner.
Whilst the identity of the trust in these circumstances will not be named on the new public register, the trust will also fall within the scope of the UK trust register, which will provide the UK authorities with extensive information about the settlor, beneficiaries and the source of funds settled into trust.
An offshore trust which acquired UK property after 6th October 2020 or which has any UK tax liability in relation to the property should have already registered with the UK trust register. Given the interaction with the Register of Overseas Entities, failure to register the trust is likely to be regarded more harshly.
From a practical perspective, offshore trustee companies may find that they need to make multiple registrations as the registrable owner of UK property to comply with the new legislation, whilst simultaneously reporting a different beneficial owner for the UK trust register.
An overseas entity with UK property must file a return annually. The information in the return depends on whether there is a registerable beneficial owner. The company may not have a registrable beneficial owner because the entity is owned by a number of shareholders each holding less than 25% or the shares and votes. If it does, then it must provide details of each beneficial owner, including name, address, date of birth and date of acquisition of the interest.
The legislation applies now.
An overseas entity which acquires property cannot apply to the Land Registry to be shown as the owner of English property until it is registered. Given that it is not possible yet to be registered, no overseas entity acquiring property can get its ownership shown on the Land Registry.
An overseas entity which wants to sell property will need to be registered before it can sell the property. The owner of the overseas entity can sell the shares in the entity, and the new owner will then be required to update the register with details of the new beneficial owner.
Entities that owned an interest in property before the legislation was introduced have until the end of the transitional period to complete the registration process. The transitional period, however, has been reduced to 6 months and we are part way through the first month. This is going to be a serious challenge for non-UK trust and corporate service providers, who will now need to identify all relevant entities with UK property, test to see if there is a registrable beneficial owner and then register with Companies House.
The practical consequences
The legislation places restrictions on the UK Land Registry. It cannot register the title of an interest in land to an overseas entity that is not listed on the new register with Companies House. That means an overseas entity will not be able to complete a purchase until it is listed on the register.
Where the Land Registry identifies land owned by an overseas entity that is not listed on the register it will prevent any sale or disposition of the land from being registered. More importantly, an overseas entity entering into a transaction without first registering will be an offence that attracts either a fine or prison sentence.
There may be an awkward situation where an overseas entity holds a leasehold interest in the UK. It will not be able to renew that lease and register it with the Land Registry. That could lead to all sorts of consequential difficulties like renewing building insurance, breaching covenants on mortgage security, etc. as well as risking penalties under the new legislation.
The legislation carries some significant penalties. Failing to register or providing incorrect information can lead to fines of up to £500 per day or a summary offence with a maximum prison term of up to 6 months rising to 12 months.
Entering into a transaction without first registering the overseas entity on the new register can attract a prison sentence of up to 5 years.
Significantly, where an overseas entity is liable for a failure then all of the directors are held culpable. Any directors of overseas entities, who delegate this task to a colleague needs to be sure that any registration programme is managed properly. Anybody leaving a corporate service provider needs to make sure they have resigned any directorships they hold in their own names.
Example – UK property acquired by Jersey company
The company is a legal person and is required to register and to provide information about its beneficial owner(s).
Example – UK property acquired by Jersey corporate trustee for Jersey trust
A Jersey trust is not itself a legal person. The Chartered Institute of Tax says “Many overseas owners of UK properties might do so through direct trust structures, which are not subject to registration under these rules.”
However, we understand that others consider that since the Jersey corporate trustee is a legal person and an overseas entity acquiring the property, it is required to register. The registration for the trustee company is then required to include details of the beneficial ownership of the trustee company.
A trust which owns UK property would be required to register with the Trust Registration Service.
Example – UK property acquired by Jersey company owned by Jersey trust
The Jersey company is a legal person and it is the registerable beneficial owner. Its registration is required to include details of its registerable beneficial owner(s). The trust is not a legal person and is not a registerable beneficial owner. The beneficiaries do not have entitlement in relation to the company, and so aren’t registerable beneficial owners of the company.
We do note that in a briefing note prepared for MPs, the Chartered Institute of Tax said “If a trust controls the overseas entity then further clarification should be given as to whether the trustees or beneficiaries would be deemed the beneficial owner.” If the beneficiaries are deemed to be the beneficial owners, then they will all need to register.
Unlike the Trust Registration Service, the Register of Overseas Entities is public (although it may not be searchable). The Land Registry is also public and so it will be possible for HMRC to link the owner to the property.
Trustees and directors may therefore wish to consider now whether all relevant tax disclosures and returns have been made. Apart from the question of whether rental income has been returned, there might be issues around;
- Whether non-resident capital gains tax returns have been made in relation to transfers of shares in companies owning UK property
- Whether individuals who live in these UK properties have acknowledged UK tax residence where appropriate
- Whether family members who visit those who live in the properties have included this as “available accommodation” in considering their UK tax residence position
- Whether any ATED liabilities have been paid
- Whether the funds to pay for the UK property have been remittances of foreign income and gains of individuals arising in these trusts, and if so whether those remittances have been declared.
Anybody that manages an offshore entity or provides professional advice to offshore entities needs to be aware of this legislation. The directors of those entities or equivalent persons need to have a plan for dealing with their registration requirements. There is not a lot of time left for offshore entities with existing property but it will be pressing for any offshore entity that is in the process of negotiating to buy or sell land in the UK.
Speak to our team if you need any help with this subject.