The most recent development in the regulatory landscape is one enshrined in company law which will require almost every company incorporated in any part of the UK, LLPs and SEs (Societas Europaea) to create and maintain a new register of people with significant control (the PSC register). The new law is part of the Government’s initiative to improve transparency and trust in business, to address corruption and reduce the risk of the UK being used as a conduit for illicit financial flows. There is no carve-out for real estate special purpose entities. Particular
consideration is needed where joint venture structures or tax transparent entities are used and/or there are overseas investors.
Whilst the new idea was proposed with some pomp by our Prime Minister at the G8 Lough Erne Summit in the summer of 2013, the eventual new law (which creates the new Part 21A Companies Act 2006) was slipped into law just before the calling of the 2015 general election through the, rather misleadingly-titled Small Business, Enterprise and Employment Act 2015.
There are a few technical exemptions from the need to create and maintain these new registers, which are very unlikely to arise in a real estate context, although if you operate your real estate investment business through a listed or a quoted company, that company will be outside of the regime. However, each underlying entity will need to comply with the PSC register regime.
The purpose of the legislation
The stated purpose of the legislation is to increase transparency in “who controls corporate Britain”. This is highly political. Our Government has a view that asset ownership is often hidden through unnecessarily complex structures and that the shedding of light on such arrangements through increased disclosure and transparency will increase investor confidence, increase tax collection and reduce financial and economic crime: these all remain to be seen. The constitutional right to privacy is not considered to be a relevant factor.
However, in truth, we fear that the regime might achieve little more than costing businesses time and money to achieve a hollow political win for the Government.
There are a few technical exemptions from the need to create and maintain these new registers, which are very unlikely to arise in a real estate context, although if you operate your real estate investment business through a listed or a quoted company, that company will be outside of the regime. However, each underlying entity will need to comply with the PSC register regime.
What the PSC register must include
The PSC register will contain the names of either natural persons and certain legal persons (such as public sector bodies) as ‘persons with significant control’ or corporate bodies as ‘registrable relevant legal entities’. The language and detail of the legislation is complex and, together with the guidance, runs to many hundreds of pages.
From 6 April 2016, all UK companies will need to create and maintain a new publically accessible statutory register that records all of the people or legal entities that have ‘significant influence or control’ over it.
If you use UK bodies corporate within your real estate asset ownership structure, you will need to understand the impact this regime has on you, ensure that you do not fall foul of the legal penalties, and understand what information about your ownership structure will pass into the public gaze.
Not a register of beneficial ownership
Many people, including our Prime Minister, have misleadingly and incorrectly described this new regime as creating an obligation on companies to disclose beneficial ownership. This is not the case. The test for “significant control” might, from time to time capture beneficial owners, but it does not do so universally. More commonly, the “significant control” test will lead to a trustee, or the owner of a trustee, rather than the beneficiary.
Key provisions for the PSC register
Under the new PSC register it will be necessary for almost all UK companies to:
- find out whether there are any people with significant control over it;
- contact those persons to confirm the position and to obtain certain required information;
- create and maintain its PSC register (from 6 April 2016); and
- deliver the PSC register information to Companies House for inclusion on a searchable public register (from 30 June 2016).
Shareholders will be under a general obligation to voluntarily provide required information to companies to support the creation of the PSC register. Those owners who fail to comply with this new regime are likely to have their share rights suspended and face criminal liability.
Persons with Significant Control (PSCs) and Relevant Legal Entities (RLEs)
A PSC or an RLE is someone that meets one of five specified conditions set out in the new Schedule 1A to the Companies Act 2006. The table below sets out a brief description of each of the specified conditions.
What to do next
It is important to examine how your real estate investments are held, and pay particular attention to joint venture structures and
where there are both UK and overseas companies involved. The level of information that will be available will increase. Management arrangements may impact on what is disclosed and it will be important to understand the exceptions described in the guidance documents.
What lies ahead for the real estate market?
As well as the PSC register regime, the UK Government is proposing further initiatives, this time focussed on overseas companies holding English real estate. At present, the Land Register already contains details of all bodies corporate holding English registered interests in land. It is proposed that a new register is created including details of beneficial owners of overseas companies holding English real estate, and for it to be necessary to obtain prior approval of the body corporate before an interest in land is acquired. The devolved administrations are considering their position. However, as proposed, it would appear anomalous for information on beneficial owners, not legal owners to be included and for this to apply to a different class of companies from those obliged to register under Part 34 Companies Act 2006.
These considerations will not go away.
The Specified Conditions (as set out in Part 1, Schedule 1A Companies Act 2006)
- Condition 1: Ownership of shares – directly or indirectly holds more than 25% of the share capital
- Condition 2: Ownership of voting rights – directly or indirectly holds more than 25% of the voting rights
- Condition 3: Ownership of right to appoint or remove directors – directly or indirectly holds the right to appoint or remove the majority of the board of directors
- Condition 4: Significant influence or control – has the right to exercise or actually exercises significant influence or control
- Condition 5: Trusts, partnerships etc – has the right to exercise or actually exercises significant influence or control over a trust or firm that is not a legal entity, which in turn satisfies any of the above conditions
Further support and advice
If you need more advice and support on your PSC register regime obligations please contact Edward Craft on +44 (0)20 7395 3099 or ecraft@wedlakebell.com.