The Economic Crime (Transparency and Enforcement) Act 2022 explained

Insight

27.05.2022

It has been over five years since the government marked its intention to create a public register detailing the beneficial ownership of overseas entities owning UK property. Progress of the legislation has been slow but Russia’s invasion of the Ukraine has led to its acceleration as part of a drive to ensure that assets held by sanctioned individuals can be controlled and disposals prevented. The Economic Crime (Transparency and Enforcement) Bill was finally introduced to Parliament on 1 March, passed the Commons Stage on 7 March and has now received Royal Assent. We explain below what this means for overseas entities owning UK property.

What is an overseas entity?

An overseas entity is any legal entity which is governed by the law of a country or territory outside the UK. This includes companies, partnerships, corporations sole, governments, and public authorities. As trusts do not have a legal personality, they are not caught by this definition but there are other provisions in the Act which may pull trusts and their trustees into the regime.

What steps does an overseas entity need to take?

An overseas entity must take reasonable steps to:

Identify their registrable beneficial owners.
Provide certain required information about those registrable beneficial owners to register them at Companies House.

It is not yet clear what constitutes “reasonable steps” but as a minimum, overseas entities must send information notices to:

All registrable beneficial owners; or
Any person who might know a registrable beneficial owner’s identity.

Any person served with an information notice must respond within one month or risk criminal and financial penalties.

Overseas entities unable to provide information on any registrable beneficial owners because either (i) they have no registrable beneficial owners; or (ii) they have been unable to identify the registrable beneficial owners, must instead provide Companies House with details of their managing officers (including their directors, managers or secretary).

What is a registrable beneficial owner?

The test to establish beneficial ownership under the Act is similar to the People with Significant Control regime (the regime applicable to UK incorporated companies). A person will be a registrable beneficial owner if they meet any one of the following conditions:

A person who holds, directly or indirectly, more than 25 per cent of the shares in the overseas entity.
A person who holds, directly or indirectly, more than 25 per cent of the voting rights in the overseas entity.
A person who holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of the overseas entity.
A person who has the right to exercise, or actually exercises, significant influence or control over the overseas entity; or
Where:
- The trustees of a trust, or the members of a partnership, unincorporated association or other entity, that is not a legal person under the law by which it is governed meet any of the conditions specified above (in their capacity as such) in relation to the overseas entity; and
- A person who has the right to exercise, or actually exercises, significant influence or control over the activities of that trust or entity.

The below simple scenarios summarise how the conditions operate:

Scenario One: Ms F (F) puts an English property into a Jersey Property Unit Trust (JPUT). The JPUT trustees are registered at the Land Registry as the legal owner of the property.
- The Act does not apply to the JPUT, because only overseas entities which have legal personality are caught.
- The JPUT will be required to register under the Trust Registration Service (TRS) but that is not a public register and does not have any impact on title registration.
- Outcome: F is NOT identified under the Act (but JPUT will be identified to HMRC through the TRS).
Scenario Two: Instead of using a JPUT, F sets up or appoints a Jersey Company to hold the English property. The Jersey Company is registered at the Land Registry as the legal owner.
- The Act applies to the Jersey Company, which will be required to register with Companies House.
- As part of the process, the Jersey Company must identify and disclose its beneficial owners. This is likely to include F if:
  - She holds more than 25 per cent of the shares or voting rights; or
  - She is a person with significant control or influence over the Jersey Company (which is likely to be the case if the Jersey Company is a nominee).
- Outcome: F is probably going to be identified.
Scenario Three: Legal title to the property is held by a Jersey Company, as in Scenario 2, but the shares are held by a trust, with F as a beneficiary.
- The Act applies to the Jersey Company, which must register with Companies House and disclose its beneficial owners.
- This will bring condition 5 of the test for who is a beneficial owner into play. Assuming any of the trustees has more than 25 per cent of the shares or voting rights in the Jersey Company or exercises significant control or influence over it, limb (a) is satisfied. If F exercises significant control or influence over the trust, limb (b) is also satisfied, and F is a beneficial owner.
- Outcome: F is probably going to be identified.
Scenario Four: F sets up or appoints an English Company to hold the property.
- The Act does not apply at all, although the PSC regime probably will.
- Outcome: F is NOT identified under the Act but probably will be identified in the English Company’s PSC register.

What information does an Overseas Entity need to provide when applying to register at Companies House?

As mentioned above, the Act requires an overseas entity that owns/is entitled to own UK property to register on the new Companies House register (the New Register), unless an exemption applies. When making an application to register, an overseas entity will need to provide several confirmatory statements and information about the overseas entity and their beneficial owners (or managing officers). Companies House will have various powers to verify the information provided. Following successful registration, Companies House will provide the overseas entity with a notice confirming the date of registration and the ID number allocated to the overseas entity.

Overseas entities will then have an ongoing responsibility to update their registration within a 14-day annual update period. The overseas entity must also notify Companies House when a beneficial owner and/or managing officer is required to be removed from the New Register. Serious criminal penalties are proposed for those who fail to comply, including custodial sentences.

Land Registry implications for Overseas Entities

To enforce the provisions of the Act the Land Registry will enter a restriction on the property register of overseas entities registered as proprietor on or after 1 January 1999. Restrictions are commonly used by the Land Registry to prevent the registration of certain disposals such as sales, transfers or mortgages unless certain conditions are met. We do not yet know when these restrictions will be added by the Land Registry, but it is likely to be at some point during the transitional period, which is explained in more detail below.

The restriction will prevent the registration of certain property disposals by overseas entities, unless they can evidence compliance with the Act (or evidence an exemption). The following disposals of property will be caught:

A transfer of a freehold or leasehold estate granted for a term of more than 7 years.
The grant of a new lease for a term of more than 7 years.
The grant of a charge.

In terms of acquiring freehold or leasehold (more than 7 years) property, the Land Registry will not register an overseas entity as proprietor unless they can evidence compliance with the Act.

The consequences of non-compliance with the Act will effectively freeze property disposals and acquisitions for overseas entities.

Transitional Provisions effective from 28 February 2022

Significantly the Act has also introduced transitional provisions imposing an obligation on overseas entities to provide details of disposals of property between 28 February 2022 and six months from commencement of the relevant provision (we don’t yet know when the relevant provisions will commence). Therefore, any overseas entities disposing of property now will need to consider the implications of the Act.

When will the Act come into effect?

Although the Act has received Royal Assent most of its provisions have not yet come into force. This is most likely because Companies House are in the process of developing the New Register and the Land Registry are similarly unprepared. Nonetheless, it is critical that overseas entities consider the implications and compliance with the Act immediately.

Status update on the New Register

On 26 April 2022, a written statement (the Statement) providing an update on the Government’s progress on the implementation of the New Register was issued by Lord Callanan setting out that an implementation group made up of officials from BEIS, Companies House and the Land Registries has been set up to progress the technical development of the New Register and establish the appropriate legal framework through secondary legislation. The Government’s intention is that a first phase of the New Register will be operational as soon as possible, which will capture new transactions and enable those in scope who already own land in the UK to register.

The Government is also finalising policy on the key aspects of the New Register which will be provided for in secondary legislation. Drafting of this secondary legislation and guidance should begin imminently with the regulations being laid before Parliament as soon as possible.

On 27 April 2022, Companies House, alongside the Statement, published an update on the progress of the New Register confirming that it will be writing to all overseas entities captured by the Act who own land in England, Wales and Scotland to make sure they are aware of their new responsibilities. It also highlights that the launch date for the New Register will be confirmed once the secondary legislation is laid with further guidance to be published at the relevant time.

If you require further information about anything covered in this insight, please contact Annabel Dean, Suzanne Conticelli, Hannah Ouseley or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.