Foreign companies and other overseas entities that own or acquire UK property will shortly be required to register their beneficial ownership on a new public register. They will also face restrictions on the acquisition and disposal of property.
The Economic Crime (Transparency and Enforcement) Act 2022 received Royal Assent on 15 March 2022, having completed the entire Parliamentary process in less than two weeks. The Act is designed to tackle well-publicised concerns over the increasing flow of ‘dirty money’ into the UK real estate market, where the true ownership and source of funds is hidden by the use of overseas companies based in shady offshore jurisdictions.
However, whilst targeted at a particular problem, the new regime will catch all overseas entities that own or acquire UK land and property. What follows reflects the position in England & Wales, but similar provisions (albeit with some differences, particularly as regards retrospective effect) will also apply to Scotland and Northern Ireland.
So, what do you need to know if you are an overseas entity that already owns, or subsequently acquires, land in England & Wales?
Register of overseas entities
Once Part 1 of the new Act is brought into force, every overseas entity that is already the registered proprietor of a freehold or leasehold title (and became registered proprietor since 1 January 1999) will have a six-month window to register their beneficial ownership on the new register of overseas entities. The information will also need to be updated annually. Failure to register or to submit an annual update will be a criminal offence, as will making a misleading, false or deceptive statement.
The register will be maintained by Companies House. The concept of ‘beneficial ownership’ is closely based on the existing register of ‘persons with significant control’ that Companies House has operated for UK companies since 2016. A beneficial owner is someone who (directly or indirectly) holds more than 25% of the shares and/or voting rights in the entity, or the right to appoint or remove a majority of the board of directors, or who exercises significant influence or control over the entity.
The new regime obviously affects foreign companies, but it also extends to any entity that has separate legal personality. So, the foreign equivalent of a limited liability partnership would be caught, but not a traditional partnership. Overseas individuals who own UK property in their own names will not have to register, although individuals may end up on the new register as the beneficial owner of a registered overseas entity.
‘Overseas’ simply means that the entity is governed by a law other than the UK. Remember that the Channel Islands and Isle of Man are overseas for these purposes and will be caught by the Act.
The Act allows the Secretary of State to exempt some entities from registration, but only where this is required in the interests of national security or for the purpose of preventing or detecting serious crime. It is expected that exemptions will be few and far between, with most overseas entities being required to register.
During the first six months from commencement, the Land Registry must identify every freehold and leasehold title where the registered proprietor is an overseas entity (and became registered proprietor since 1 January 1999) and register a restriction on each such title. However, the restriction will not actually take effect until the end of the six-month period.
The wording of the restriction has not yet been published, but the Act says that the restriction will:
- prevent the registration of certain dispositions by the registered proprietor – a transfer, the grant of a lease exceeding seven years or a legal charge
- unless the registered proprietor is a registered overseas entity (or exempt) – and since an entity ceases to be a registered overseas entity if the annual updating has not been done, this will need to be checked
- the registered proprietor mut be a registered overseas entity (or exempt) at the time of the disposition – which suggests that it will be difficult, if not impossible, to rectify the position later
There are also a number of carve-outs. So, for example, the restriction will not bite on dispositions made pursuant to statutory obligations or pursuant to a court order. In practice, the two most important carve-outs are likely to be:
- a disposition pursuant to a contract made before the restriction was registered
- the exercise of a power of sale conferred on a mortgagee or a receiver appointed by a mortgagee
It is a criminal offence to make a disposition that is prohibited by the restriction.
So far we have been considering the position where the overseas entity already owns the property when Part 1 of the Act comes into force. But what about acquisitions by overseas entities after that date?
Once the relevant provisions are in force, an overseas entity will not be able to register a transfer (or a new lease exceeding seven years) at the Land Registry unless it is a registered overseas entity (or exempt). This requirement must be met at the date the application is made, not the date of the transaction.
This may not be a problem where the overseas entity already owns property. In this case it should already be a registered overseas entity. But an overseas entity acquiring its first property will need to be organised.
There is also a timing issue, particularly in the short term. There is no six-month lead-in period for acquisitions, nor any exemption for acquisitions pursuant to pre-commencement contracts. So, if a Land Registry application is required in the early days of the new regime, the overseas entity will need to become a registered overseas entity before making the application.
This poses a problem for the entity. It won’t have been able to register with Companies House in advance, because the register does not yet exist. But an application to Companies House once the register goes live risks being stuck behind applications lodged by some or all of the estimated 30,000 overseas entities that already own land in England & Wales and who will all be required to apply to join the new register within the first six months.
Companies House – who are currently unable to meet their own targets for registering company charges – will need to process applications to join the new register quickly. Any significant delays in the system will have the potential to cause serious problems for overseas purchasers. They risk losing their Land Registry priority if they cannot even submit their Land Registry application until their Companies House application has been completed.
When the Land Registry registers the overseas entity as proprietor, it will add a restriction to the title in the terms discussed above. This is to ensure that the entity remains a registered overseas entity at the time of any future disposition.
We do not yet know when these provisions will be brought into force. Clearly, legislation is not rushed through Parliament within a fortnight to be left to stagnate on the statute book for too long. Other provisions in the Act relating to sanctions and unexplained wealth orders have already been implemented.
Companies House, the Land Registry and other stakeholders are currently working on the mechanics of the register of overseas entities, and it is to be expected that the new register will go live as soon as the practical issues have been resolved.
In the meantime, affected overseas entities should start preparing now, collating the information that the Act says will be required. As well as the prescribed information on the overseas entity and its beneficial ownership, the application will need to confirm whether the overseas entity has disposed of any properties since 28 February 2022.
Similarly, overseas entities that own no property when these provisions come into force (and therefore do not need to apply to join the new register), but who have disposed of property since 28 February 2022, will need to submit details of those disposals.
Companies House has confirmed that it will be writing to all affected overseas entities to warn them of their new responsibilities. However, we are concerned whether they will have accurate and up-to-date information for every entity involved.
The flip side
The above analysis inevitably concentrates on the position of the overseas entity. But the new regime (and particularly the restrictions that will start appearing on titles held by overseas entities) means that anyone who deals with an overseas entity will need to ensure that the overseas entity is a registered overseas entity at the relevant time.
This will particularly affect someone who is buying from an overseas entity, taking a lease from an overseas entity or a lender who is lending to an overseas entity. These persons will find themselves unable to register their transfer, lease or legal charge unless the overseas entity is fully compliant (including the annual updating).
For further information, please contact:
Bill Chandler, Hill Dickinson