As we wrote last week, in response to recent events in Ukraine, the government is at long last introducing a register of overseas entities that own UK property. The aim of the register is to stop the UK property market being used to launder dirty money from overseas.
This article provides an update, because the draft legislation is making very fast progress through Parliament and some key amendments have already been made by the House of Commons. For last week's article click here.
Current position on the Bill's progress
The provisions to introduce the register of overseas entities are contained in the Economic Crime (Transparency and Enforcement) Bill 2022 (the Bill). The Bill passed all its stages in the House of Commons on Monday 8 March, subject to some amendments. The first and second readings in the House of Lords have already taken place and the Committee Stage is timetabled for 14 March. The Bill is widely expected to receive Royal Assent before the end of March.
Key amendments made in the House of Commons
- 18 month transitional period reduced to 6 months Transitional provisions in the original Bill allowed overseas entities that already own UK land a grace period of 18 months from the Act's commencement date to comply with the registration requirements. That period had been cut to 6 months. This is to reduce the scope for overseas entities that already own property in the UK to sell up and get their money out before the registration requirements come into effect. The Bill requires HM Land Registry to place a restrictions on any title currently held by an overseas entity. Subject to some exceptions, the restriction will prevent sales, charges and leases of more than 7 years from being registered unless the entity is a registered overseas entity at the time of the transaction. The original Bill provided for the restriction not to take effect until 18 month after the legislation comes into effect. That period has been reduced to 6 months to tie in with the shortened transitional period.
- Daily default fine increased to £2,500 As discussed in our earlier article, the obligations imposed on overseas entities are backed up by criminal sanctions on the entity itself and on every officer of the entity who is in default (fines and imprisonment). The daily default fine has been increased from £500 to £2,500 as £500 was thought to be too low a figure to provide a meaningful deterrent to breach of the obligations.
Key remaining issues with the draft legislation
We highlight three remaining issues below.
The Bill as drafted will not necessarily reveal the ultimate beneficial owner of the property The Bill does not require disclosure of the ultimate beneficial owner of the property, but rather the disclosure of the beneficial owner of the overseas entity which in turn owns the property (the two may be the same but will not necessarily be). This problem was highlighted by the Chartered Institute of Taxation in a briefing paper for MPs issued on 9 March, and it is a serious defect. It does not accord with the government's stated intention, and would leave a lot of scope for overseas entities to continue to hide the identity of the ultimate beneficial owners of property they hold. This issue may be addressed by the House of Lords.
Sale of charged properties where the borrower is in financial difficulties As mentioned above, HM Land Registry will place a restriction on titles already owned by an overseas entity and, subject to some exceptions, the restriction will prevent registration of certain dispositions (sales, charges and the grant of leases for over 7 years) unless the entity has complied with the overseas entity registration requirements at the time of the transaction. One of the exceptions is a disposition made by a lender exercising a power of sale or leasing contained in a registered charge, or a disposition made by a receiver appointed by such a lender. While this exception is useful, it does not provide all the protection a lender needs. When a borrower gets into serious financial difficulties, rather than exercising its power of sale a lender may wish to persuade the borrower to realise the asset voluntarily. Where the borrower is an overseas entity, that will not be possible unless the entity has complied with the registration requirements.
- Dispositions by insolvency practitioners Another exception is where the disposition is made by a specified insolvency practitioner in specified circumstances. The scope of this exception is not yet clear as "specified insolvency practitioner" and "specified circumstances" will be defined in regulations to be issued after the Bill has been passed.
Where do we go from here?
We must now wait and see how the House of Lords reacts to the Bill and whether it makes any further amendments. We will provide more detailed analysis once the final form of the legislation is known.
While equivalent provisions are proposed for Scotland and Northern Ireland, this article deals only with the proposals as they affect land owned by overseas entities in England and Wales.