This article discusses the issue of beneficial ownership as it applies to how foreign-owned UK property is being treated under new government powers.
“Who benefits” – or qui bono? to use the Latin - is one of those terms that any police detective, journalist or tax inspector might ask when examining certain types of behaviour. And in tax matters policymakers such as the UK government have focused more on the concept of beneficial ownership. Once opaque structures for holding assets are being scrutinised as never before. These raise difficult questions such as how to get the balance between legitimate privacy and illegitimate secrecy right? The UK’s trusts sector, and jurisdictions such as those of the Cayman Islands and British Virgin Islands, among others, are not happy about how the UK has pushed for public registers of beneficial ownership.
A specific area in this respect is how foreign owners of UK property conduct themselves. This topic is addressed here by Charlie Fowler, an associate in the tax and estate planning team at Collyer Bristow LLP. The views of the author are not necessarily shared by this publication but the editors are pleased to share these views and invite readers to respond. Email email@example.com
Shareholders of overseas companies holding UK residential and commercial property will be publicly named in a register from 2021, under draft legislation published by the Government last month. Historically, owning UK property through a non-UK company provided anonymity to the beneficial owners of such entities, but as the political landscape continues to shift towards greater transparency, disclosure of the ownership information is set to become a requirement for any transaction involving non-UK companies and UK bricks and mortar.
Currently, information about the corporate owner of UK property is available (for a small fee) through the UK Land Registry, albeit limited to the name and registered address of the company. If that company is registered in the UK, a quick search at Companies House shows (for no fee) not only the company directors, but also any persons with significant control ("PSCs") over the company, which can include its shareholders. However, if the company is an overseas entity then, depending on the jurisdiction of incorporation, information about its beneficial owners is not available.
As things currently stand therefore, overseas individuals – for whom confidentiality is often a key concern – can hold UK property whilst avoiding public scrutiny. However, the government is seeking to call time on this arrangement, and has set out its proposals in the draft Registration of Overseas Entities Bill.
The definition of an overseas entity is widely defined as one that has a separate legal entity under the law by which it is governed. Any such entity will, from 2021, be required to register with Companies House if it owns, holds or disposes of UK property which is:
-- Residential or commercial freehold property; or
-- A registered lease of over 7 years.
Who qualifies as a beneficial owner?
The test for a beneficial owner will mirror the definitions of the PSC register, which all UK companies are already required to maintain at Companies House. A beneficial owner (A) of an overseas entity (B) is a person or entity that broadly satisfies one or more of the following conditions:
1. A owns, directly or indirectly, more than 25 per cent of the shares in B;
2. A holds, directly or indirectly, more than 25 per cent of the voting rights in B;
3. A holds, directly or indirectly, the right to appoint or remove a majority of the board of directors of B; or
4. A either has the right to exercise, or actually exercises, significant influence or control over B.
Where a non-UK entity holds qualifying UK property, relevant information about all beneficial owners meeting any of these tests will be submitted to Companies House and kept on a register available to the public for free. This will include the full name and country of residence of such individuals. Their residential address will also be disclosed, but will not be listed publically on the register.
It should be noted though that trusts will not be included on the register. The government considers that there are legitimate grounds for ensuring that information about the beneficial owners of trusts is not publicly available. Trust beneficiaries should therefore, subject to careful drafting of trust documents, be kept off the register.
What steps do companies need to take to comply?
Although currently in draft form, the legislation is expected to come into effect in 2021. If they have not done so already, overseas entities should ensure that information about their beneficial owners is complete and up to date. It is expected that affected companies must register at Companies House within 18 months of the commencement of the Act, although a notice to register before this deadline could be given, in which case the entity will then have six months to register.
Once submitted, the information on the register must be updated every year.
What are the consequences for non-compliance?
The legislation provides for two main ways of enforcing the registration, namely:
2. criminal liability for breach.
Restrictions on the ability to deal with UK property
Where a property is identified as owned by an overseas company, the Land Registry will enter a restriction on the title register. No disposition in respect of that property will be registered unless the entity has been registered at Companies House.
This will raise concerns for lenders. The draft legislation provides that lenders will not be able to register their security over a property until the overseas corporate owner has complied with these requirements. However, once the lender’s charge has been registered, the restriction will not prevent a sale where a lender exercises its power of sale.
The draft legislation includes serious penalties for non-compliance, including fines and/or prison sentences of up to five years. Offences include knowingly or recklessly providing false information in response to an information notice.
Although the government is consulting on the draft legislation over the course of the summer, it is unlikely that the next draft of the bill will change substantially. Affected companies should check that their information is up to date, to ensure compliance when the register comes into force.