Last month, the UK government announced that the planned public register listing the beneficial ownership of overseas companies will be launched in early 2021.
Any overseas company which owns or purchases UK property (or bids on government procurement contracts) will be required to enter details of its beneficial ownership on this register.
This announcement follows the 2016 discussion paper issued by the Department of Business, Energy & Industrial Strategy (BEIS), the results of which were published last year. Over recent years, there has been an increasing public perception that overseas companies are used as vehicles to invest funds from criminal or illegitimate activities in UK property. The BEIS says that over £135 million of UK property owned by overseas companies is currently the subject of a criminal investigation but this represents only a small proportion of the UK property owned by offshore companies. In the majority of cases, the use of an offshore entity to hold property is unlikely to have any criminal motivation. Overseas companies have been used legitimately for decades as a tax mitigation measure or as part of a structure for global wealth planning.
In addition to addressing the criminal concerns, the decision to launch a public register to make the ownership of these overseas entities more transparent is in line with the UK government's general policy to try to discourage the ownership of UK property through offshore companies. Many of the UK property tax changes in recent years have had a greater effect on overseas owners (than domestic owners) and so the introduction of this new register is an anticipated extension of the previous changes. The register also brings the UK in line with other countries which have introduced or are looking to introduce similar registers and follows the international climate of greater transparency as to how assets are owned and wealth is managed.
What will the register look like?
Some of the detail of the proposed register remains uncertain and a draft bill is due to be published this summer which will contain more specific proposals. The draft bill will be introduced to Parliament next year (in the summer of 2019). It is expected that in many ways, this register will follow the same approach as the register of people with significant control (PSC register) which is already in force in relation to UK corporate entities.
The register will be held by Companies House and will be available for the public to view without charge, although overseas companies will have to pay to register their details.
It seems likely that all overseas companies which own or are looking to purchase UK property (either freehold property or leasehold property with a lease term of over 21 years) will be required to register details of their beneficial ownership. The registration requirements apply to registered land and will not apply to overseas companies which already own unregistered land (presumably because the requirements will be impossible to enforce in these cases). Overseas companies looking to purchase unregistered land will be caught.
Overseas companies will not be able to buy, sell, charge or grant a long lease of property in the UK unless their details and information about their beneficial ownership have been registered on the new register. It is suggested that an overseas entity will be issued with an official registration number once the registration is completed by Companies House.
An overseas company wishing to buy UK property will have to provide its registration number to the Land Registry before it will be able to register its title to that property.
Under the current proposals, an overseas company which already holds UK property will need to apply for a registration number within one year of the new register being introduced. Failure to comply will mean that the company will be prohibited from dealing with the property, i.e. selling or charging it or granting a long lease. The government plans to place a restriction on the title register at the Land Registry of properties held by non-compliant overseas companies in order to prevent these companies from dealing with their properties. There may also be other sanctions for non-compliance, including criminal offences.
In addition, the registration requirements are likely to be ongoing. It is proposed that an overseas company will need to update the register every two years if it is to maintain its registration number.
As lenders, how will this affect you?
The new register will have a significant impact for lenders involved in UK property transactions. There are a number of practical concerns:
1. Enforcement of security
If you have provided a loan which is secured against a UK property owned by an overseas company and the company fails to comply with the registration requirements, that company will be prevented from dealing with the property. This may hamper repayment of the loan.
Lenders will likely benefit from some protection as any restriction placed on the title is likely to permit lenders to enforce a sale of the property pursuant to a charge which was in place before the register was introduced (notwithstanding any failure to submit information to Companies House). However, it would still be advisable to ensure that existing mortgagors comply with the registration requirements to ensure that the property can be leased or sold in the manner envisaged in the original credit approval for the loan. Many existing finance documents may already contain either a representation and/or an undertaking to ensure compliance with all laws and so, as a lender, you should be entitled to enforce registration of the beneficial ownership but lenders will wish to consider whether the existing provisions are sufficiently specific.
2. New lending
Once the register is introduced, it will not be possible to register a new charge against a property held by an overseas company if that company has not complied with the registration requirements. Accordingly when taking a charge over a new property which is to be purchased or is already held by an overseas company, from 2021, lenders will need to ensure that their solicitors have a valid registration number for that company. It is not clear how long the registration process will take so this is something which lenders should request at the outset.
Although most of the tax advantages of owning UK property through offshore entities no longer exist, one of the remaining attractions was the confidentiality and protection offered by these ownership structures.
The fact that beneficial ownership will become a matter of public knowledge will likely be a concern to both onshore and offshore investors. Security and confidentiality concerns will be something that banks may wish to discuss with their clients in the context of any proposed UK property ownership. Some clients may prefer that the beneficial ownership is held by a family member rather than the principal. The government has indicated that it will introduce protection measures which will allow information to be suppressed when the beneficial owner is at risk of harm or when there is a wider public safety risk. However, this option is only likely to be available in a limited number of circumstances.
How can lenders protect themselves?
Finance documents will need to cater for the new proposals and we list a few of the amendments that are likely to be required:
- Non-compliance with the registration requirements should be made an event of default, allowing the lender to take immediate action to protect their position.
- As the registration requirements are likely to be ongoing (with returns required every 2 years), effective monitoring provisions through representations and undertakings should be included.
- Evidence of compliance with the registration requirements should be a condition precedent.
- Where finance documents are already in place, lenders should ensure that the relevant borrowers comply with the registration requirements. This may involve amending existing documentation to build in the necessary provisions where possible or relying on the further assurance provisions to request appropriate evidence of compliance. The earlier the appropriate provisions can be incorporated, the better (even though not all of the detail of the registration regime is known).
Although the new register will not be implemented for a few years, lenders would be well advised to take steps at this stage to ensure that their clients are aware of the new registration requirements. Lenders may also wish to begin reviewing existing facility template documents (where the borrower may be an overseas company) to ensure that they provide sufficient power to ensure compliance with the new registration regime.
For some borrowers, the changes will prompt a desire to change their existing ownership structures which may necessitate a review and amendment of the existing facilities. Lenders may wish to begin these conversations over the course of the next 12 months.
The direction of government policy remains consistent and ownership over UK property through foreign companies is something which legislation will continue to aim to prevent.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances. © Farrer & Co LLP, February 2018.