Will the real beneficial owner please stand up?

Posted: 07/06/2017

---

The Government has just completed a consultation on the creation of a new register of beneficial ownership for all overseas entities with an interest in UK property – Tarnya Pilgrim and Liz Gillingham explain what is involved.

Overseas legal entities that fail to register necessary information about their beneficial owners will be prevented from dealing with UK property (buying, selling, granting a long lease and mortgaging it). Criminal sanctions could also apply if the Government’s proposals go ahead as envisaged.

Registration of title prevented

It is expected that, where an overseas legal entity fails to provide information on who owns and controls it:

• any application to register a transfer of property or the grant of a long lease to the overseas entity will be cancelled;
• legal title will not pass; and
• possibly (the consultation suggests this) the transfer document will also be void, so that beneficial title will not pass either.

The consultation also notes that:

• new lending secured on that property will be prohibited; but
• banks will be able to enforce existing charges.

“Property” is freehold or leasehold (where the original term exceeds 21 years) and includes unregistered property requiring first registration.

New title restrictions

When an overseas entity is newly registered as proprietor of UK property, a note will be put on its registered title (a title restriction) reflecting the ongoing statutory prohibition on dealings, unless the overseas entity fully complies with the new beneficial ownership registration requirements.

Overseas entities already owning registered property will have one year (the transitional period) in which to register their beneficial owners. Overseas owners who do not want to disclose that information could choose to dispose of, or possibly restructure, their UK property interests during this period. At the end of the transitional period, irrespective of compliance, a title restriction will be placed on their registered title.

Criminal offence for non-compliance

The Government is also proposing criminal offences where overseas entities:

• still owning UK property have not registered beneficial ownership information at the end of the transitional period;
• fail to update their beneficial ownership information when required; or
• knowingly or recklessly provide false or misleading information to Companies House.

Who will maintain the register?

Companies House. A registration fee will be charged.

Will information be publicly available?

Yes, but in limited circumstances (eg threat of violence) information can be suppressed from the register.

Who is a “beneficial owner” for the purpose of the register?

It is proposed that the definition of “beneficial owner” mirrors that of a “person with significant control” (PSC) in part 1 of Schedule 1A to the Companies Act 2006. Broadly this states that a person is a PSC of a UK company if they:

• directly or indirectly hold more than 25% of the shares;
• directly or indirectly hold more than 25% of the voting rights;
• directly or indirectly hold the power to appoint or remove a majority of the board of directors;
• otherwise have the right to exercise or actually exercise significant influence or control; or
• have the right to exercise or actually exercise significant influence or control over a trust or firm that is not a legal entity, which meets one or more of the above conditions.

The rules on who is registrable as a PSC are complex and these complexities could flow through to the new overseas register. There are already many reports of UK companies failing to comply with the PSC legislation.

It is recommended that companies seek legal advice to establish who their beneficial owners are to avoid breaching the existing legislation and new requirements.

What information needs to be provided?

The same details of “persons with significant control” over the overseas entity are required for a registrable legal entity under the PSC regime.

Will there be updating requirements?

Yes – beneficial ownership details must be updated at least every two years (the validity period). Entities may choose to update more regularly.

Effect on conveyancing practice

Overseas entities wishing to deal with UK property caught by the proposals will have to:

• identify and confirm their beneficial ownership information;
• register their beneficial ownership information with Companies House, which, following a successful application, will allocate a registration number (ID number); and
• supply the ID number to the appropriate land registry as part of their application to register title (registration application).

The appropriate land registry will check that beneficial ownership information has been provided and is up to date before completing the registration application.

In the future, before contracting with an overseas entity, checks with Companies House will be required to ensure that:

• the overseas entity has a valid registration number; and
• beneficial ownership information is up to date and the validity period will not expire before registration at the appropriate land registry.

For transactions where the period between exchange and registration could exceed the validity period (eg conditional contacts or option agreements) or where a third party will continue to have an interest in the property after registration (eg mortgagees or joint venture participants), protective provisions should be included in transaction documents:

• requiring the overseas entity to maintain beneficial ownership information and ensure their registration remains valid; and
• allowing termination where the registration becomes invalid (either because the beneficial ownership information becomes out of date or because it was false or inaccurate).

To avoid delays, practice is likely to develop requiring overseas entities to register (or update) their beneficial ownership information before entering into negotiations or (at the very latest) before exchanging contracts.

Next steps

Prepare for change – the new regime could be introduced by April 2018.

The PSC regime

The proposed registration regime adopts many elements of the PSC regime introduced in 2016 in relation to UK companies.

Who does the PSC regime apply to?

All UK companies (excluding most listed companies).

The PSC regime is due to be extended to other types of entities, including unregistered companies and some listed companies.

What information needs to be provided?

For registrable individuals: name, service address, country of residence, nationality, date of birth and usual residential address.

For registrable legal entities: name, registered or principal office, legal form and governing law, company register and registration number.

Is the information publicly available?

Yes – through the internal register and Companies House – except for residential addresses. In limited circumstances (eg threat of violence) information can be suppressed from the register.

What are the penalties for non-compliance?

It is a criminal offence to fail to comply with certain parts of the PSC rules, punishable by imprisonment or a fine.

Failure to comply with a restrictions notice issued by a company to a potential PSC will restrict transfer of the interests in question (eg shares) and prevent any rights from being exercised, or payments (eg dividends) being made, in respect of those interests.

This article was published in Estates Gazette in May 2017.

---

Return to news headlines