That’s the question the UK and Scottish Governments are endeavouring to answer with two new pieces of draft legislation: The Registration of Overseas Entities Bill (the UK Bill) and the Register of Persons Holding a Controlled Interest in Land (Scotland) Regulations 2021 (the Scottish Regulations). Both Governments want to look behind the public registers of land ownership and uncover – albeit to differing extents - the parties or individuals who truly own and control what happens to the land. But they want to do so for different reasons.
Objectives of the legislation
Each Government has a different stated objective. The UK Government has declared that it wants to prevent and combat the use of land in the UK by overseas entities for the purposes of laundering money or investing illicit funds by increasing transparency in overseas entities engaged in land ownership in the UK.
Meanwhile, the Scottish Government has said that it wants to increase public transparency in relation to individuals who have control over decision-making in relation to land, to ensure there can no longer be categories of land owner or tenant where, intentionally or otherwise, control of decision-making is obscured.
Who is within scope of the legislation?
There are important differences between the two regimes, one of which is who is within scope.
The UK regime is aimed solely at overseas entities who own certain registered land across the UK. To be in scope, the entity must have legal personality in the jurisdiction in which it is constituted. Overseas trusts directly holding UK land will not be covered by the UK regime. The Scottish regime, by contrast, is aimed at everyone who owns land in Scotland (including trusts) in situations where there may a separate party holding the controlling interest in land.
The proposed UK-wide regime
The UK Bill seeks to achieve its transparency aims by requiring overseas entities who are registered as the freeholder or leaseholder of certain UK land, to register with Companies House and obtain a registration number. Along with other information, the overseas entity must disclose details of its beneficial owners. A beneficial owner may be an individual, a legal entity (but only if the legal entity is itself subject to prescribed beneficial ownership disclosure requirements including those under the UK's persons with significant control (PSC) regime) or a government or public authority.
Ascertaining the beneficial owner involves a similar exercise to that used to ascertain the person with significant control under the UK's PSC regime. In short, it is the person or entity who:
- holds more than 25% of the shares or voting rights in the entity, or
- has the right to remove or appoint a majority of the board of directors,
- or has the right to exercise,
- or actually exercises significant influence or control over the entity.
The draft guidance on the UK Bill states that ”significant influence or control” is intended to cover individuals with a level of control that is broadly equivalent to those with an interest in more than 25% of the shares or voting rights in the entity.
Overseas entities will be required to register under the UK Bill (and disclose their beneficial owners) if they are the registered owners of land which has been registered in the Land Registry of England and Wales since 1 January 1999 or in the Land Register of Scotland from 8 December 2014. The different dates signal from when the respective registrars can track overseas ownership of property.
The proposed Scottish regime
The Scottish Government wants to look behind the owner registered in the Land Register or recorded in the Register of Sasines to find out who controls decisions made in relation to all land in Scotland regardless of when the land was recorded or registered, and no matter what type of person or entity is recorded as the owner (i.e. it's not only overseas entities that are covered). The question asked by the Scottish Regulations is whether there is someone other than the recorded owner who holds the "controlling interest" in the land. Such a person is referred to as an “associate”.
There are various ways of determining who is an associate but essentially it boils down to who has significant influence or control over what happens to the land. Control is said to be where a person can direct the activities of another and significant influence is where a person is able to ensure that another person will typically adopt the approach that the person desires. So, everyone from investment funds to sports clubs or families whose home is owned under a trust could be caught by the regulations.
How will the information be held?
For those beneficial owners whose details have to be registered, the information required under both regimes is similar to that which has to be submitted under the PSC regime. The Scottish regime does not require the usual residential address of an individual, only a contact address; while the UK regime would require both a home address and a service address. There will be protections for persons who may be placed in danger if their information was made available to the public.
The information submitted will be held in different places. The UK Government will be creating a Register of Overseas Entities which will be held and operated by Registrar of Companies (Companies House) while the Scottish Government will be launching the Register of Controlled Interests in Land which will be held and operated by the Keeper of the Registers of Scotland.
Once registered, there will be updating requirements but these will be different. Overseas entities registered under the UK regime will have to update the information held by Companies House annually. Updating of the Scottish Register of Controlled Interests will be event driven and only required when changes to the controlled interest or owner/tenant of the land have occurred.
Each Government has taken a different approach to enforcing their respective regimes.
Under the UK Bill, if the overseas entity does not register where required to do so, it will be unable to register transactions relating to land it has registered in England from 1 January 1999, or land it has registered in the Land Register in Scotland from 8 December 2018. It will also be unable to register the title or long lease of any new property that they acquire or grant a charge over their property in the UK. Notices prohibiting such transactions will appear against the relevant land in the Land Registry of England. No such notices will appear in the Scottish Land Register. It will be for the Keeper to block such transactions where the registered number is not supplied.
The Scottish Government on the other hand does not propose to block the registration of land transactions where a person or entity has not registered the controlling interest in land. They propose to impose criminal sanctions if the controlling interests are not registered.
Note however, that transactions involving overseas entities who registered land in Scotland from 8 December 2014 or who are buying or taking a long lease of land in Scotland will be blocked if the overseas entity has not registered under the UK regime.
There are other penalties for non-compliance. It will be a criminal offence both north and south of the border if the Registers are not updated. Those who knowingly or recklessly supply misleading, false or deceptive information could face a jail sentence of up to two years. Those who attempt to proceed with the sale, purchase, lease or charging of property without first having registered could face a jail sentence of up to five years and a limited fine. Given the UK regime is targeting overseas entities, it is difficult to envisage how such sanctions will be imposed on persons overseas. The real teeth of the regime may be in the denying of registration of the legal title to land.
Both regimes are due to come into force in April 2021 but with very different timescales for compliance. The UK Government has proposed giving overseas entities in scope up to 18 months to register. The Scottish Government is proposing that everyone register the controlling interest in their land within six months of the legislation coming into force. Given how broad in scope the Scottish Regulations are, this seems like an incredibly short timeframe.
The corporate world has been getting to grips with the PSC regime for over two years and plenty of wrinkles in that regime have become apparent. It is now the turn of the real estate world to grapple with complexities involved in identifying beneficial and controlling interests. That task has been made slightly easier; both Governments have made attempts to avoid duplication of reporting by exempting those entities which already have to make beneficial ownership disclosures under the PSC regime.
The Scottish Government has, however, included overseas entities within the ambit of the Scottish Regulations, meaning that – as currently drafted - overseas entities with land or interested in acquiring land in Scotland and other parts of the UK will be required to provide details of beneficial ownership under the UK regime and any controlling interest under the Scottish regime. The Governments are aware of the overlap and it is to be hoped that this will be dealt with before the final legislation is published.
The consultation on the UK regime has closed. The consultation on the Scottish Regulations will close on 8 November 2018.