The invasion of Ukraine by Russia has put an increased focus on the beneficial ownership of property in the UK. The government has published draft legislation that will implement a public register detailing the ultimate beneficial ownership of UK property.

This represents a significant development and will impact clients holding UK property through an overseas company, trust, partnership or similar structure. Such clients should seek immediate advice to ascertain their reporting obligations and the impact of the legislation on their structures.

Background

The government has been discussing the possibility of a public register of overseas entities owning UK property since 2016. The idea was this would extend the "persons with significant control" (PSC) register that was introduced for UK companies in April 2016. It was anticipated that the register would be implemented by 2021, but this had stalled (possibly as a result of Brexit, general elections, COVID-19 etc.). Following the invasion of Ukraine by Russia, this matter has been brought to the top of the political agenda and is now a priority for the government.

What is proposed?

The measures are included in the Economic Crime (Transparency and Enforcement) Bill, currently before Parliament. The bill will create a publically available register identifying the ultimate beneficial owner(s) (i.e., natural persons) of overseas entities that hold land in the UK. Various sources cite that there are more than 90,000 properties in England owned by overseas companies. Of those, approximately 85,000 are owned by companies located in jurisdictions where the names of the company's ultimate beneficial owners are not publically ascertainable. The new register will be administered by the Registrar of Companies for England and Wales. The rules are closely aligned with those that apply under the existing PSC regime and broadly require public disclosure of the following:

• A person who holds (directly or indirectly) more than 25% of the shares in the overseas entity;

• A person who holds (directly or indirectly) more than 25% of the voting rights in the overseas entity;

• A person who holds the right (directly or indirectly) to appoint or remove a majority of the board of directors of the overseas entity;

• A person who has the right to exercise, or actually exercises, significant influence or control over the overseas entity; and

• A person who has the right to exercise, or actually exercises, significant influence or control over the activities of a trust or entity where (where the trustees of a the trust, — or the members of a partnership, unincorporated association or other entity, that is not a legal person under the law by which it is governed governed — meet any of the conditions specified above (in their capacity as such))

Whilst cases (a) to (c) may be considered more straightforward, there is likely to be complexity around cases (d) and (e), especially where an overseas entity is held within a wider trust structure. Depending on the facts and terms of the trust, it may be that the protector, settlor, trustees, and in some cases, a beneficiary could be the person regarded as the ultimate beneficial owner. The bill provides little detail on this issue and one would expect this to be expanded in official guidance on similar terms to that currently in existence for the PSC rules.

or example, under the current PSC statutory guidance, a person would exercise "significant influence or control" over a company if (i) they are significantly involved in the management and direction of the company, or (ii) their recommendations are always or almost always followed by shareholders who hold the majority of the voting rights in the company. In relation to a trust, a person has the right to exercise "significant influence or control" if they have the right to (i) appoint or remove any of the trustees, (ii) direct the distribution of funds or assets, (iii) direct investment decisions of the trust, (iv) amend the trust deed, or (v) revoke the trust.

The information that must be provided about the beneficial owner will include their name, date of birth, nationality, usual residential address, service address and the date on which the individual became a registrable beneficial owner. There are obligations to update this information as it changes. For existing owners, there will be a transitional period of 18 months for the overseas entity to register.

If an overseas entity has no reasonable cause to believe that it has any registrable beneficial owners, then information about each managing officer of the entity must be provided instead. There currently appears no definition of what is "reasonable" so further guidance on this point may be given.

Restrictions will be placed on persons who do not comply with the registration requirement to make it difficult to transfer the property, and those who provide false information could be jailed for up to five years. The law will apply retrospectively to property bought by overseas owners. Overseas entities that wish to purchase land in the UK will be required to have satisfied the registration requirement before they are able to register their title. Once registered, an entity will be allocated an overseas entity ID by the Registrar of Companies.

There are specific provisions relating to limited partnerships. The draft bill states that a person does not meet the definition of a beneficial owner of an overseas entity by virtue of only being a limited partner, or by holding (directly or indirectly) shares or a right in a limited partner. The legislation also addresses the nominee position, noting that a share held by a person as nominee for another is to be treated as held by the other (and not by the nominee). It should be noted that the nominee itself may have the requirement to register on the existing UK Trust Register.

Other points to note regarding Unexplained Wealth Orders

The draft legislation also seeks to increases the UK National Crime Agency's powers to seek unexplained wealth orders (UWOs).

UWOs are an investigatory tool that can be used to require an individual to prove that a particular asset was obtained through legitimate means or face civil recovery and/or criminal proceedings. Law enforcement agencies will be given more time to review material provided in response to a UWO (this can be extended from 60 days, provided the enforcement authority is working diligently and expeditiously, further time is needed by the authority, and it is reasonable in all the circumstances for the time limits to be extended).

The bill also gives such agencies protection from the substantial legal costs that can result from an unsuccessful UWO application. This was previously regarded as a factor discouraging applications for UWOs. Under the draft legislation, costs are only to be awarded where the relevant authority acted "unreasonably", "dishonestly" or "improperly". These terms are not defined within the legislation so one would expect this to be open to judicial interpretation.

It is expected that the UK authorities will increase their use of UWOs over the coming months.

Conclusion

Beneficial ownership and transparency will be a key focus in the coming years and the balance of when and how these measures will be introduced (which was more uncertain after Brexit) has changed. In the context of complex wealth management structures (such as discretionary trusts with multiple beneficiaries, private trust companies, limited partnerships, foundations, etc.) the application of the rules will be complex and require careful navigation.

It is essential that clients are ahead of the curve in anticipation for what will be significant compliance obligations with potential criminal penalties for noncompliance.

*See alert for authors: Public disclosure of the beneficial owners of overseas entities owning UK property