Proposed register of beneficial owners of overseas companies and other legal entities

How it may affect property transactions in England and Wales

Who needs to know about these proposals?

• overseas companies and other legal entities that own or are intending to acquire UK property; and
• anyone dealing with such overseas companies and other entities, for example, funders taking security over property and property owners selling property.

The background - As part of the Government’s plans to clamp down on money laundering and corruption, the Department for Business, Energy and Industrial Strategy (BEIS) published a call for evidence in April 2017 on proposals to create a public register showing who owns and controls overseas companies and other legal entities that own UK property (or participate in UK Government procurement).  BEIS has recently published the Government’s response.

Timing - the Government intends to publish draft legislation in summer 2018 and to make the register operational in 2021.

Outline of the proposals - The detail will only be known once legislation is passed.  However, the response to the call for evidence indicates that the new regime will be along the following lines.

Where will the new beneficial ownership register be held?  At Companies House.

Who will have to register?  All overseas legal entities that can hold property and hold or acquire certain UK property interests.  The regime may permit exceptions, for example, where beneficial ownership information is already available elsewhere. 

Which acquisitions and holdings will the regime apply to?  Registered freeholds and registrable leases (that is leases of more than seven years from the date of grant, and some shorter leases taking effect in future and “discontinuous” (timeshare) leases).

What information will have to be provided?  Details of the entity’s beneficial owners.  The entity must check information with the beneficial owners before supplying it for the register.  This checking process may delay registration.

How will beneficial ownership be defined? In the same way as in the people with significant control (PSC) regime that applies to UK companies, i.e. a beneficial owner is a person who:

(i) directly or indirectly holds more than 25% of the shares in the company;
(ii) directly or indirectly holds more than 25% of the voting rights in the company;
(iii) directly or indirectly holds the power to appoint or remove a majority of the board of directors of the company;
(iv) otherwise has the right to exercise or actually exercises significant influence or control over the company;
(v) has the right to exercise or actually exercises significant influence or control over a trust or firm that is not a legal entity, which meets one or more of conditions (i) to (iv).

The PSC regime also provides for situations where individuals hold rights or shares collectively or in a joint arrangement and for adaptations to the above definition to allow for different types of entity, for example entities that do not have share capital, do not have general meetings at which voting rights can be exercised, or do not have a board of directors.   It is proposed that these adaptions should also apply to the new register.

How often must beneficial ownership information be updated? At least every two years.  The Government is considering requiring more frequent updates.

What is the position where an entity is unable to provide beneficial ownership information?  It will have to provide information about its managing officers instead.  However, the entity will have to take reasonable steps to find out if it has a PSC and if so, to identify them.  It is intended that guidance on taking reasonable steps will mirror the PSC register guidance. 

What will an overseas entity have to do before acquiring a UK property?  Provide beneficial ownership information to Companies House which will allocate a registration number.  This number must then be supplied when applying to register the acquisition at HM Land Registry.

How will the regime apply to entities that already own UK property?  They must either provide beneficial ownership information to Companies House and obtain a registration number or dispose of their UK property.  The deadline for taking one of these two options is likely to be over a year from when the regime comes into force.

How will the regime be enforced?

• Legal title will not pass to an overseas company acquiring UK property unless it has at completion a beneficial ownership register registration number. 
• Once a company is registered as owner at HM Land Registry, a note will be put on the register of title to the property to prevent registration of a sale, registrable lease or charge of the property unless the entity complies with the beneficial ownership register requirements.
• It will be a criminal offence to fail to provide information to the new register, to fail to keep it up to date, or to knowingly or recklessly provide false or misleading information.

How will the regime affect lenders?  The Government’s call for evidence indicated that:

• new charges will not be registered against an entity that had not complied with the requirements of the new register.  Lenders will therefore want to make compliance with the regime a condition precedent of releasing funds;
• however, where an entity had not complied with the requirements of the new register, a lender could still enforce existing security and dispose of the property.  The Government was concerned to avoid creating a loophole whereby a beneficial owner with a charge over the property could make use of this exception to sell, despite the restriction on the register. However, the response states that the Government has concluded it is not practical to ensure only “legitimate lenders” can repossess and dispose of property subject to a restriction on the register.  Lenders will hope that the regime will therefore allow them to enforce existing security, even where the borrower has not complied with the regime. 

Who else may be affected by the new rules?  Anyone entering into a type of property transaction covered by the regime with an overseas entity will want the entity to comply with the rules, so that necessary registrations can be made at HM Land Registry and legal title passes as the parties intend.

The detail is awaited!  At present, the detail of how the new regime will work (and therefore the steps overseas entities acquiring or holding certain UK property interests and their counter-parties will need to take) are not clear. The Government has commissioned research on the likely impact of the new register on overseas investment in the UK property market and may change its proposals in response to the results of this research.  We will know more once the legislation is passed.

This information is necessarily brief and is not intended to be an exhaustive statement of the law.  It is essential that professional advice is sought before any decision is taken.

© Stevens & Bolton LLP May 2018