Back in 2016, the UK government proposed the introduction of a public register of the beneficial ownership of UK land and property where that land or property was held by an overseas entity.
One of the original aims of the register was to enable the government to enforce changes to the inheritance tax rules which were introduced in April 2017 and which effectively rendered non-UK entities transparent for inheritance tax purposes to the extent that those entities held interests in UK residential property. Since then, the Government has found its attention diverted to tackling the twin issues of Brexit and a global pandemic and the proposed register drifted to the parliamentary sidelines.
In recent weeks, however, the register has taken on renewed importance in the enforcement of sanctions and the fight against economic crime and, as a result, it has been fast-tracked through Parliament. This is not primarily to tackle the potential risk to the inheritance tax coffers but rather to improve transparency and tackle financial crime, no doubt as part of the government’s response to the events that are unfolding in eastern Europe.
The register is implemented by the Economic Crime (Transparency and Enforcement) Act 2022. The act recently received royal assent but has not yet come into force. The legislation requires overseas entities to register with Companies House and to provide details of the beneficial owners of the entity if the entity owns or wishes to acquire UK land.
An 'overseas entity' is defined as a 'legal entity' governed by a law outside the UK. A 'legal entity' is a body corporate, partnership or other entity that is a 'legal person' under its governing law. Non-UK incorporated companies, limited liability partnerships (LLPs) and foundations established under foreign law will all be within the scope of the register.
Ostensibly, the register does not apply to overseas trusts that own land directly in the UK as trusts are not separate legal persons. However, it is very common for trustees to hold assets through corporate vehicles or through corporate nominees and these entities will be affected.
Whether the details of a trust will need to be disclosed as part of the registration of an overseas entity will depend on the make-up of the particular asset-holding structure. For example, where the trustee of an overseas trust is a non-UK resident corporate trustee that holds UK land through an overseas entity, that entity will need to report the details of the trust as the beneficial owner of the entity is a trustee.
In an alternative scenario where a non-UK resident corporate trustee holds UK land directly, the corporate trustee will have to register and report details of its own beneficial owners but will not need to report details of the trust.
The register will apply to both commercial and residential land and property and to freehold and leasehold interests (with some limited exceptions).
When the act comes into force, overseas entities will have a relatively short period in which to comply with its provisions and it will affect disposals of land by overseas entities that have taken place since 28 February 2022.
Where an overseas entity is the registered owner of land in the UK acquired in England or Wales after 1 January 1999, there will be a six-month deadline, from when the act comes into force, for the overseas entity to register and provide the required details of its beneficial owner.
The obligation to register by the deadline cannot be avoided by disposing of the land or property now. If the overseas entity has disposed of land at any time since 28 February 2022 or does so at any time before the end of the six-month period after the act comes into force, the entity must still register. An offence will be committed if there is a failure to comply.
The consequences of failing to register could be severe and may result in criminal and civil penalties.
For overseas entities already holding land or property in England and Wales, it will not be possible to register a disposal of the land or property unless the entity is registered.
In terms of new acquisitions, if an overseas entity fails to register with Companies House and to provide the required information on its beneficial owners, it will not be possible for the overseas entity to be registered as the legal owner of land in England and Wales. The overseas entity would, therefore, be unable to sell, lease or mortgage the land.
The definition of 'registrable beneficial owners' provided in the act is modelled on the 'people with significant control" (PSC) regime for UK companies. A 'beneficial owner' may be an individual who, or another legal entity which, satisfies one or more of the following:
Where the trustees of a trust satisfy any of the above, any person who has significant control or influence over the activities of that trust will be a beneficial owner for these purposes.
The information required to register a registrable beneficial owner will include: their name, date of birth, nationality, usual residential address and a service address.
Overseas entities will need to update the register annually. An entity may apply to be removed from the register if the entity is no longer registered as an owner of land or property in the UK.
The act specifies that, where a trust is a registrable beneficial owner, the information provided must include the name of the trust and the date on which it was created. It also requires specific additional information about the beneficiaries, settlor or any other person who has control over, or powers in relation to, the trust (including a protector).
There are some limited exemptions from the requirement to register. For example, individuals will not need to register if they can demonstrate that exemption is in the interests of national security or for the purposes of preventing or detecting serious crime.
Companies House will maintain the register and it will be open to public inspection. However, importantly, certain information such as residential addresses and dates of birth will not be available to the public.
Once the registration process has been completed, overseas entities will receive an "overseas entity ID" from the Registrar of Companies.
The scope of the new register does create the potential for duplication of work for trusts that hold property in the UK. In some cases, the trustees of a non-UK resident trust will need to provide beneficial ownership information for the purposes of the register and will also need to satisfy the requirements of the UK’s Trust Registration Service.
Elements of the act require secondary legislation before they are effective and Companies House will need to adjust its procedures and make standard registration forms available for the new register. Given the speed with which the bill passed through Parliament and the priority now attached to it by the government, we can expect the act to come into full force very soon.
Directors, administrators and beneficial owners of overseas entities that hold UK land or property should now seek advice, where necessary, and consider whether there is a requirement to register and what level of information will need to be provided. Overseas entities must ensure that they comply within the six-month window, given the severity of the penalties for failing to do so.
The introduction of the register will no doubt make families consider whether the ownership of UK land through non-UK entities remains appropriate. Such entities may no longer provide the same level of privacy. In addition, many of the historical UK tax advantages of such structures have been eroded in recent years (including through the 2017 IHT changes referred to earlier). For existing structures, alternatives such as collapsing companies and holding properties directly or on trust should be considered.
As projections for the UK property market remain strong, now may be an opportune time to consider restructuring ownership. Doing nothing and restructuring at a later stage in the future could risk capital gains tax liabilities arising which may not have arisen if restructuring were carried out earlier.
If you have any concerns about the act or would like to discuss its contents in more detail, please contact us.