New Beneficial Ownership Register for UK Properties owned by Overseas Companies and other Legal Entities – to go live in 2021
What is it?
A new beneficial ownership register for overseas companies and other legal entities owning UK properties has been on the cards for some years. Please see article here for detailed background.
Progress has been slow, with a UK government discussion paper published in March 2016, a call for evidence not published until April 2017 and the government response to the call for evidence published nearly a year later, in March 2018. Notwithstanding the busy Brexit schedule however, this initiative has backing in the House of Lords and a draft bill is due to published before this year’s parliamentary summer recess and be introduced for debate by next summer. The new register is due to go live sometime in 2021.
What does this mean?
That depends on your perspective. It is clearly a win for corporate transparency campaigners. It also closes a loophole because the beneficial ownership of UK companies is (to an extent) traceable via the register of people with significant control (“PSC Register”), which has been up and running at Companies House since June 2016. The beneficial ownership of property registered to UK companies is therefore subject to disclosure requirements but overseas entities owning UK property were outside this regime. Likewise, it may benefit law enforcement agencies investigating illegal activities that have been masked by complex off-shore structures and hopefully make it more difficult for proceeds of crime and corruption to be laundered via UK property. Advocates have also flagged the business case for maintaining the UK property market as a reputable place for clean investment.
Investors and property practitioners will, however, be looking at the fine detail of the draft bill carefully to see how it will work in practice, what will need to be done to adapt to the new application of the register and whether there are any unintended consequences.
Fine detail you say? Tell me more.
The March 2018 paper gives some indication as to what we can expect in the draft bill. There have been some changes of tack during the consultation process. Some talking points are:
The new register will apply to overseas owners of all registrable leases
In 2017, the government proposed that overseas owners of registrable leases for a 21+ year term would need to comply (as well as freeholders). The intention being to capture ‘significant leases’ i.e. broadly where there is capital value. In the March 2018 paper, however, the government has declared that all registrable leases will be caught.
In England and Wales, leases of 7+ years are subject to compulsory registration at HM Land Registry, so overseas owners of any such interests would fall within the regime, notwithstanding that they may have entered into a market rent lease with no capital value i.e. for occupational purposes only.
Also, leases of a shorter duration where the term starts 3+ months after the date of the lease are registrable at HM Land Registry in England and Wales, as are discontinuous leases granted out of a registered title. As it stands, it looks like such leases would be caught too. It remains to be seen whether these may be carved out of the regime, although a blanket approach may be easier for HM Land Registry to administer.
Existing owners will have a limited time to comply
The intention is that overseas entities will not be able to buy or sell UK property unless they have registered their beneficial ownership on the register hosted by Companies House, through which they will obtain a registration number which will then need to be submitted to HM Land Registry as evidence of compliance.
Existing overseas owners will also be caught, even if there is no intention of making a disposition and irrespective of how long they have owned the property. Once the system is fully up and running, a note will be placed on the HM Land Registry title register of all overseas-owned UK property, flagging that it cannot be sold without a beneficial ownership registration number.
However, to start with there will be a grace period for existing overseas owners. The government initially suggested one year but is now considering allowing longer (although it seems unlikely to exceed two years). Existing owners will need to be made aware of the new regime and then organise a disposal within that time if they do not want to fall within the reporting regime. Non-compliance will result in them being unable to sell the property and may even give rise to criminal sanctions along the lines of those that apply in connection with the PSC register (i.e. unlimited fines and/or prison sentences of up to two years).
Keeping the register up to date
There will be a requirement on all overseas entities to update the register regularly. This will be on a schedule rather than driven by events. Initially, the government suggested updates every two years but is looking to shorten that. Failure to update may likewise give rise to criminal offences.
The lender loophole
The government does not intend the restriction on disposals to catch legitimate lenders exercising their power to repossess and sell property in the event of default. If the overseas owner fails to update their information (or, in the case of existing owners, fails to register at all) then lenders on those properties will not be caught by the restriction on disposals.
However, the government flagged that loans could be created as a way of getting round the reporting requirement and asked for input on how to close this loophole. They suggested distinguishing ‘legitimate’ lenders in some way but have given up that idea following the responses to the consultation. No workable solution has yet been suggested.
For further detail on the lender loophole and the other talking points outlined above, we will have to wait and see what comes through in the draft legislation. Another question, given the slow rate of progress so far, is whether it will be issued by the self-imposed deadline of the start of the summer recess in July.
Laura is a senior associate in our Commercial Real Estate team.