Introduction

The Government’s plan to deliver a largely public register of the beneficial owners of overseas entities that own, or plan to own, UK property by 2021 has moved another step closer, following the Government’s publication of its response to a Joint Committee (“the Committee”) report on the draft Registration of Overseas Entities Bill (“the Bill”), which made several recommendations aimed at improving the draft Bill.

The Fox Williams Real Estate team has been tracking the progress of the proposed legislation since 2017 and reported further following the publication of the draft Bill in July 2018, which forms a key part of a wider range of measures aimed at increasing the market transparency of UK property ownership, tackling corruption and fostering confidence among investors in the UK as a magnet for global investment.

Our commentary on the major points arising from the Government’s report are:

Definitions of “Legal Entity” and “Overseas Entity”

One of the fundamental issues in the draft Bill identified by the Committee in its report is the scope of the definitions of “overseas entity” and “legal entity”, as only those entities, satisfying these definitions will be subject to its requirements. The Committee recommended Companies House be given additional decision-making powers, by way of a “pre-clearance” mechanism to decide if overseas entities are registrable, in cases where the entity or its advisors find it difficult to determine.

While the Government acknowledged the vital need for parties to understand the scope of the draft Bill and has promised to issue guidance to clarify its remit, it stopped short of seeking to implement a pre-clearance mechanism. Instead, the Government has indicated overseas entities will be confident in their own legal status and that anti-money laundering checks will assist in confirming such status.

“Equivalent” Registers

The draft Bill provides that the Secretary of State may modify the registration requirements where overseas entities are already providing beneficial ownership details to an “equivalent” register in its own country of formation. The Government is still considering a definition of “equivalent register” but has confirmed that such registers must as a minimum, be publicly accessible, and Companies House will usefully provide a direct link to approved equivalent registers.

Trusts

The Committee raised concerns that trusts may be used as a vehicle to circumvent the registration requirements of the Bill. As a trust does not have “legal personality”, it cannot directly hold land. Instead, the individual trustees (or a legal entity of some kind) hold land ‘on trust’ for the beneficiaries, and so will not in every case be required to register with Companies House. The Committee acknowledge, however, that the expansion of the Trust Registration Service (“TRS”) and forthcoming implementation of the Fifth EU Anti-Money Laundering Directive (“the Directive”) will assist in tackling the use of trusts in money laundering.

The Government’s commitment to implementation of the Directive and expansion of the existing TRS is intended to have the effect that trusts and overseas entities are required to register under the respective regimes where they meet the criteria, thereby closing any apparent loophole as between trusts and other kinds of entity in the context of the registration requirements. This is doubtless an area of the Bill which will attract scrutiny during the legislative process.

Thresholds and “Significant Influence or Control”

The conditions in the draft Bill for determining who is a beneficial owner of an overseas entity follow the UK’s People with Significant Control (“PSC”) regime. Schedule 2, Part 2 of the Bill sets out that a beneficial owner of an overseas entity may be an individual, a legal entity or a public authority if they hold directly or indirectly, more than 25% of the shares or voting rights in the overseas entity. The Committee urged the Government to consider lowering the 25% ownership and voting rights threshold, due to concerns that the threshold could undermine the draft Bill’s aim to capture the true beneficial owners of overseas entities.

Perhaps justifiably, the Government rejected the Committee’s proposal to lower the 25 per cent threshold on the basis that such a figure aligns with global norms in beneficial ownership, is consistent with the PSC regime and that this percentage also reflects the level of control a person needs to be able to block special resolutions of a company under English company law.

Reporting Requirement

An overseas entity will not be able to register title to land unless it has first registered with Companies House and complied with its updating duty. Under the draft Bill, overseas entities are required to update the register within 14 days after each 12-month period beginning on the date of the overseas entity’s first registration at Companies House.

The Committee had put forward a proposal to include in the draft Bill a requirement that overseas entities, in addition to the annual updating requirement, also update the Register before any disposition is made. The Government agreed that the accuracy of the register is crucial but is wary of the administrative burden on overseas entities if both annual and ‘event driven’ updates are required. We could, however, see additional updates on the updating duties in the draft Bill, so watch this space.

Enforcement

Failure to comply with the Bill’s reporting requirements could result in criminal prosecution. The Committee welcomed the strength of the penalties in the draft Bill, observing that legislation without ‘teeth’ is no deterrent. However, it recommends that civil penalties should also be imposed, on the basis that civil penalties are easier than criminal sanctions to enforce abroad. The Government will consider the proposal but highlighted that the aim of the Bill is to increase transparency and encourage registration, rather than increase prosecutions. It is hoped that commercial factors will also encourage compliance; overseas entities will be prohibited from dealing with property unless it has complied with the Bill’s updating duties.

Next Steps

The Government is currently reviewing the draft Bill and will need to resolve practical issues, such as the scope of the updating duties before the Bill can further progress.