Who is caught (so to speak)?
The requirement to do anything under the new Act falls on any overseas entity which owns property in the UK. There are three distinct elements:
An overseas entity
This is deliberately a wide phrase. It is anything which has a separate legal personality under the law by which it is governed and which is governed by the laws of a country or territory outside of the UK. That includes entities resident in the Isle of Man, Channel Islands and anywhere else in the world. So the entity itself does not need to be in a jurisdiction subject to formal sanctions, or which might widely considered to be high risk. As we said, the Act is about compliance obligations, criminality follows on after. That being said, an overseas entity does not include private individuals or trusts (provided they are not deemed to be separate legal persons from the individual trustees under the relevant local law). Trustees that own land in the UK will certainly fall to be registered under the Trustee Registration Service, see our article for more information on this. But there are still potential compliance issues for trustees who are beneficial owners of an overseas entity (discussed in more detail below). This may lead to a doubling up of work.
Ownership of property
The Act has a specific definition of a ‘qualifying estate’ in land to fall within the Act. It is either a freehold interest, or a leasehold interest originally granted for a term of more than seven years. The definition is deliberate, as these are interests which are required to be substantively registered at the Land Registry (and its equivalents elsewhere in the UK). So if the entity owns a short lease, or a charge over land, there are no obligations under the new Act.
Property in the UK
For the purpose of this article we will focus on land located in England and Wales (which falls under the jurisdiction of the Land Registry) but the Act introduces broadly equivalent requirements for land located in Scotland and Northern Ireland.
What do I have to do?
For now, nothing, as few of the operative provisions are currently in force. They will be introduced through enabling regulations but we expect these to be introduced imminently and, as we will explain, once they are in place there are tight timescales for compliance. Once the register has been created overseas entities will have six months to apply for registration. Assuming you are an overseas entity there are two main obligations:
- To apply for registration at Companies House. This will involve:
- the making of certain prescribed statements; and
- providing additional information.
- To make an annual return each year including confirming any changes to the register information in the preceding 12 months since the last statement.
What goes into the prescribed statements?
There are three default statements which an entity can make.
A declaration containing the details of the entity’s ‘beneficial owner(s)’
This is very similar to the principles set out in the ‘Persons with Significant Control’ (PSC) regime for UK companies. So it will include anyone holding 25% or more of the shares or voting rights in the entity, or anyone who has the ability to appoint or remove the majority of the board or other governing body. Finally, a beneficial owner can be someone who has the right to (or actually does) exercise significant influence or control over the entity. The key point here is that the Act is interested in identifying individuals and legal entities which meet certain disclosure requirements (as stipulated in the PSC regime); so there is a trickle-down effect. If an entity is owned/controlled by another entity which is not registrable then the disclosure obligation continues until you find a person or registrable legal entity at the end of the chain. Similarly, although a trust will not count as a legal entity for the purpose of the Act unless it is categorised as such by the law under which it is governed, to the extent that the trustees are beneficial owners then the Act requires disclosure of the details of the trust. Likewise if the beneficial owner is a nominee then it is the person who controls the nominee that is registrable. For more information on how the PSC rules are applied please see this article for more detail.
A declaration that there is no one who meets the test of being a beneficial owner (because they do not satisfy the control tests above)
In that case the entity must list its directors or other officers.
A declaration that the entity has been unable to determine if there is a beneficial owner (having made due enquiry)
Again details of the relevant directors or officers must be provided instead.
What information has to be provided?
It is more extensive than you might think (certain personal information about individuals such as their home address will not actually appear on the register itself, although it is still required). For the overseas entities it includes:
- country of incorporation
- registered/principal address
- an address for service
- an email address
- its legal form and governing law; and
- whether details of the entity are available on a public register and any relevant registration number.
For beneficial owners the information required is equally extensive. For example, where the owner is an individual it includes:
- date of birth
- usual residential address
- an address for service; and
- the date on which they became a registrable beneficial owner
Similar information is required for other types of entity as well as for managing officers where applicable. Where beneficial owners are trustees then, in addition to the information on the registrable trustees, details of the trust’s name (if any) and its beneficiaries; the settlor’s details are also required.
How far back does the obligation extend?
It is not unusual for legislation to have retrospective effect, especially when introduced at short notice to counter a specific mischief. What is unusual about this Act (in terms of the amount of administration involved for all sides) is how far back. In this case, any property in England and Wales acquired after 1 January 1999 (and which is still held by the entity) ‘counts’ towards the need to become registered.
Note that for Scotland the period is significantly shorter, only properties acquired after 8 December 2014 are relevant.
What are the penalties for failure to comply?
The first thing to note is that the penalties under the new Act are criminal, not civil. So not only can a range of fines be imposed but jail sentences of up to five years can be imposed for a number of offences. These include failing to provide prescribed information, failing to update or providing false or misleading information. In a number of cases liability will fall on directors and officers of the entity (especially where there is little or no information on the beneficial owners themselves). This will increase the administrative responsibility on those providing fiduciary services on behalf of others.
Alongside criminal sanctions, the government hopes to impose a practical restraint, namely, the inability to dispose of the property assets themselves. At the same time as the Companies House register is being created, the Land Registry has been tasked with identifying properties owned by overseas entities. It will then be required to register a restriction on any dealings with that title until there is evidence of compliance with the new Act. In effect an unregistered entity will not be able to sell, charge or lease an existing property or be registered as the new owner of a property until it has complied with any outstanding requirements. At the time of writing we are waiting for further clarification of the Land Registry’s requirements. We assume, as the register will be open for public inspection, that a copy of the corresponding register entry will be sufficient. The Act requires registered entities to be issued an ID number but it is not clear whether this is a once and for all number (which seems more likely) or if it is updated each year after filing the annual return. We anticipate that contract clauses will soon be appearing with wording to address the transactional issues the new regime will prompt.
What about exemptions and exclusions?
The Act allows the minister to publish further regulations to exempt certain entities from the registration requirement. We can only speculate, but would imagine that if the entity is subject to a similar disclosure regime (with a publicly viewable register) in its home jurisdiction then it may be exempted from the UK requirements. This would seem to satisfy the ‘transparency’ principle of the Act’s title but no further information is currently available.
How long does an entity have to comply with the new Act?
Once the provisions come into force there is a six-month window to submit applications for registration to Companies House. We do not know what form the register will take or how many applications Companies House will receive (and how long it will take to process them). Nonetheless we recommend that overseas entities take the following steps so that they can be ready to submit registration applications at the earliest opportunity:
- Identify any properties in England and Wales acquired after 1 January 1999 (or after 8 December 2014 in Scotland).
- Identify the owning entity and its nature and legal structure.
- Identify anyone who appears to meet the test to be a beneficial owner and obtain relevant registration information on them. This may be difficult to fully assess at this time (and similar challenges arise with the PSC regime), but it is still helpful to begin the process of assessing the current ownership structure of the relevant entity.
- Identify the current officers/directors of the entity and if their details will need to form part of the registration submission.
- Prepare a data sheet of the key information collected.
- Consider the longer term strategy for your UK based property assets. A disposal of the property will not, of itself, avoid the effect of the Act as the Act includes provisions to capture transactions which take place after 28 February 2022 but before the new registration regime is in place. Nevertheless, alternative longer term positions may include de-enveloping the property (see our previous article).
- Stay alert for further announcements on the formal opening of the register.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at March 2022.