When will the legislation come into force?
At the moment, the new legislation to increase the transparency of overseas investment in the UK is intended to kick in in 2021, although the exact date for implementation has not been confirmed. Once the law has come into force, overseas entities that own UK property will be required to disclose their beneficial ownership structure on a publicly accessible register.
Entities who do not comply with the new rules will not be able to deal with UK property.
Following an initial consultation in 2017, the Government published a draft bill in July last year, with an invitation to the Joint Committee (a group of MPs and Lords appointed to review the proposed legislation) to provide a report on the draft bill. The Government’s response to the Committee’s report has just been published. In this briefing we look at both the Joint Committee’s comments and the Government’s response.
The principle points are:
What information will need to be disclosed?
Overseas entities that come within the remit of the register will be required to provide information on their beneficial ownership similar to that required by the PSC register (i.e. beneficial owner’s name, nationality, address and nature of control over the company).
The draft bill states that an individual, legal entity or public authority will be a beneficial owner if they hold more than 25% of the shares or voting rights in the overseas entity. The Committee urged the Government to consider lowering this threshold but the Government intends to keep it at 25% - the sensible rationale being that it mirrors the level of control a person needs (under English company law) to block a special resolution of the shareholders of a company. This also reflects the level of control required for disclosure on the PSC register at Companies House.
The draft bill also grants the Secretary of State the power to modify the registration requirements where information is available elsewhere on an “equivalent register”. This will mean that the overseas entity still has to register in the UK but that their disclosure requirements may be reduced. The Government is still considering what best constitutes an equivalent register but has confirmed that it must, at a minimum, be publicly accessible.
How will it be policed?
Overseas entities will be prevented from carrying out typical dealings with UK property such as buying/selling, granting leases of over 7 years and granting a charge, unless they have provided sufficient information about their beneficial owners to Companies House. HM Land Registry will not register any of these dealings unless the applicant has provided a registration ID number, which Companies House will issue once satisfactory beneficial ownership information has been received.
Having been involved in the consultation process we are delighted to see that the bill addresses some of the concerns that we raised concerning distressed disposals following the insolvency of a non-complying overseas entity.
The draft bill now provides exceptions for certain dispositions by a non-complying overseas entity, for instance on an enforcement sale (i.e. the exercise of a mortgagee’s power of sale by the charge holder or an LPA receiver appointed by them).
Unfortunately, there are no equivalent protections for the sale of the property by administrators. This may be because administrators appointed over an overseas entity will have a duty to realise assets of that entity for the benefit of creditors. Prior to a disposal of property, administrators should be in a position to update the register themselves or require the directors to do so (as is the case with updates to the PSC register for distressed UK companies). If this is the case, the lack of an exception for administrations will not prevent disposals by administrators. We will look out for Government guidance to clarify this point.
When must the register be updated?
Under the draft bill, a registered overseas entity will be required to update its beneficial ownership confirmations each year. However, the Committee noted that the register should be as accurate as possible at the point at which dispositions take place – i.e. in addition to the annual update. The Committee’s concern is that it is on the disposition of the property that any potential money laundering is likely to occur. The Government is considering how this may be achieved practically, and so this is likely to be one of the few areas where the draft bill is significantly amended. We will keep an eye on developments in this regard.
Impact for Lenders
Given the importance of ensuring that an overseas entity complies with its registration requirements (in order to ensure the disposition and registration of security at HM Land Registry are not prevented due to non-compliance by the overseas entity) lenders should consider including additional CP requirements. For instance, where the borrower is financing the purchase of a property, the lender would want to see evidence that the seller and the borrower have complied with their registration requirements prior to drawdown.
The draft bill requires the registrar to provide every registered overseas entity with a notice confirming registration, which will include the entity’s registration ID number. Lenders are likely to require a borrower to provide a certified copy of this, along with evidence that the borrower has complied with their ongoing requirements to update the register.
We will continue to keep a close eye on this topic. We will provide further updates as the draft legislation progresses and make sure that you’re fully briefed well before the expected 2021 implementation date.