As part of the move towards greater transparency, the Government has issued a call for evidence on its proposal to introduce a register of beneficial ownership of overseas companies (and other legal entities) which own real property in the United Kingdom. If implemented, this will be the first register of its type in the world.
The requirement for all UK companies and other legal entities to maintain a register of persons with significant control (PSC) has been in force for over a year and is now a well-established compliance requirement.
The Government is conscious that the UK property market attracts a great deal of investment to the UK – benefitting the economy – and feels that more needs to be done to ensure the integrity and reputation of that market. It sees the register of beneficial ownership of UK property as being a key way of achieving this.
The proposed rules will require any overseas entity to file details of its ultimate beneficial owner, which will be publically accessible, before it can acquire or dispose of UK property.
This is only a call for evidence, which is a preliminary stage in the Government's process for implementing law, and the detail of the proposals may well change during the process. For instance the recent election result and the Brexit negotiations could affect the speed at which these proposal are implemented, or even the Government's desire to do so at all. However, as it stands, the key proposals for this register are:
• The regime will apply to all overseas companies and other entities that are capable of holding property. This is necessarily an incredibly broad definition to ensure that it captures the wide range of entities which may legally acquire property. There are bound to be teething issues before it is clear exactly which overseas entities are caught and, to an extent, this will be determined by the laws of other countries.
• The rules will apply to all freeholds as well as leaseholds where the original term is for more than 21 years, as the intention is to capture leaseholds that are analogous to freeholds. Furthermore, where property is unregistered and becomes subject to first registration (for example on a transfer), these rules will apply.
• Although the call for evidence describes this as a beneficial ownership register, our understanding is that the Government will follow the rules and requirements set out by the existing PSC legislation, and therefore the person with significant control will need to be recorded on the register, rather than a beneficial owner. It would certainly be helpful if the legislation followed the same tests and interpretation as with the existing PSC rules.
• Where overseas entities already own property, the Government proposes a one year transition period within which they are able to sell, lease or mortgage the property without being fully compliant with the new rules. However, after that period the overseas entity will be prohibited from selling, leasing or mortgaging the property (meaning the Land Registry will not register the sale) where it has not complied with the filing requirements. The call for evidence goes further and states that a transfer of property by an existing overseas entity will be void if these rules are not complied with. However, given the uncertainty that would arise from this approach – for example the purchase price may have already been paid by the buyer - the expectation is that such a draconian sanction will not be imposed and, instead, the Land Registry will simply refuse to register a sale (which seems a sufficient deterrent in its own right).
• Once the rules are in force, if an overseas entity wishes to acquire property, it must file the required beneficial ownership information and it will be allocated a registration number, which will be provided to the Land Registry when any property transactions are carried out.
• Where an entity fails to provide to the Land Registry with the relevant registration number as part of an application to register property, the application will be cancelled and the transfer will not be registered. Therefore a purchaser faces the prospect of not being registered as the owner of property which they have acquired, if they do not comply with these rules.
• In all cases, a note will be included on the relevant Land Registry register to the effect that it is a requirement that the relevant overseas entity complies with this legislation; this will operate as a warning to any buyer.
• The proposals envisage that it will be a criminal offence to fail to provide information when required to do so. There is therefore a draconian sanction for non-compliance. Clearly, there is an extraterritorial effect to these rules and enforcement of these criminal sanctions will need to be considered in more detail.
• It is proposed that Companies House will maintain the register (as it does with the PSC Register). There will therefore need to be an element of communication between Companies House and the Land Registry.
If implemented, this is potentially a drastic change to the way in which UK property is transacted where an overseas entity is involved.
Evidently, there are other options for purchasers, such as buying a property in the name of an individual (although this may not suit in the case of corporate structures) or acquiring property in the name of a UK company. Although that UK company will need to maintain a PSC register, the more draconian rules in relation to the property ownership and restrictions will not apply to that UK company.
If you require further information on anything covered in this briefing please contact Anthony Turner ([email protected] ; 020 3375 7460), or your usual contact at the firm on 020 3375 7000. Further information can also be found on the Corporate page on our website.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, June 2017