New ID number required for offshore companies owning UK properties
There is an increasing body of evidence that offshore corporate vehicles are used in UK property transactions by criminal organisations to hide and launder illicit flows of money from bribery, corruption and organised crime.
In order to make it harder to use UK property to launder illicit funds and to increase the transparency of who ultimately owns and controls UK property the government is passing new laws. The draft Registration of Overseas Entities Bill was published is July 2018 and the regime is expected to be operational by 2021. The legislation will require any overseas entity that wishes to own land in the UK to takes steps to identify their beneficial owners and to register them on a publically accessible register. The new regime will apply in England, Wales and Scotland.
Since April 2016 UK companies and entities must create and maintain a register of the people with significant control (PSC register), or the registrable relevant legal entities. Where one of the parties to a transaction is a UK company the PSC register can be used to check who ultimately owns or controls the UK company with which they are transacting. This enables the other party to make a more informed judgement about the circumstances of the transaction. There is currently no equivalent register for overseas companies and so the government is legislating to address the imbalance.
A new register of overseas entities owning UK property and their beneficial owners will be created and hosted by Companies House. Overseas entities must take ‘reasonable steps’ to identify any registrable beneficial owners in relation to the entity. Following production and verification of the information Companies House will issue the entity with a unique registration number known as an ‘overseas entity ID’.
The register will rightly be based on the PSC register and it is intended that the information it contains will mirror the PSC register. The PSC register is pending a government review in early 2019 and so unless the changes recommended by this review are also incorporated into the legislation for the register of overseas entities the current flaws in the PSC register will also transpose into the new register.
Overseas entities within the scope of the legislation include companies, partnerships and other entities with legal personality. Trusts do not fall within this category. Overseas trusts that directly hold UK property are already subject to legislation which requires registration of beneficial ownership information with HMRC. This information is accessible to UK law enforcement agencies.
When the register is operational, at the time of any application by an overseas entity to register a disposition of UK property the entity must have a valid ID number (or be classified as an exempt overseas entity). If it doesn’t have one the Land Registry will not register the entity as proprietor of a freehold interest or a leasehold interest granted for a term of more than 7 years.
The beneficial ownership information must be updated annually in order for the ID number to remain valid. Failure to update the register annually is a criminal offence, as is providing false or misleading information.
On registration a restriction will be entered on the title of the property which will prevent the entity transferring the freehold, granting a lease of more than 7 years or granting a legal charge without compliance with the regime. Certain dispositions will be exempt (e.g. those made pursuant to a court order such as a lease renewal or power of sale).
Overseas entities already owning UK property will be given a grace period of 18 months in which to provide their beneficial ownership information to the register or dispose of the property. Non-compliance after this period is an offence. Irrespective of compliance, at the end of this period the Land Registry will enter a restriction on the title of the property with the same effect as the restriction for newly acquired properties.
It will be a criminal offence for an overseas entity to make a disposition which cannot be registered. In the event that a disposition of this nature is completed the beneficial interest will transfer, but not the legal interest.
The two key routes of enforcement will be the registration of a restriction on the Land Registry title of the property and criminal sanctions comprising penalties and imprisonment of up to five years for some offences.
Government believes just under 8,000 entities will be affected by the new legislation. Overseas entities should act now to identify their beneficial owners and take steps to do so going forward. Buyers contracting with overseas sellers may be wise to carry out increased due diligence to ensure they can be registered as the proprietor of the property.
Further regulations setting out the detail and how the new register will work in practice are awaited along with the final wording of the legislation, but the biggest hurdle will be maintaining the accuracy and integrity of the information contained in the register.