Paradise Lost: Draft "Registration of Overseas Entities Bill" reaches major milestone

On 20 May 2019, the Joint Committee of the House of Commons and House of Lords issued a report making recommendations regarding the draft Registration of Overseas Entities Bill (the Bill). The Bill has very important ramifications for overseas investors in UK property.

What is the Bill?

The Bill proposes to create a public register held by Companies House of the beneficial owners of UK land bought by overseas entities (the Register).

More specifically, the Bill requires all overseas entities that are purchasing land, already own land, or have a registrable lease over land in the UK, to identify their beneficial owner(s) and provide this information to Companies House. Failure to comply with this would result in civil sanctions; further failure to do so could lead to criminal sanctions.

Who does the Bill apply to?

This Bill is to apply to all overseas entities that own land in the UK, or are proposing to do so. An overseas entity has been defined as a body corporate, a partnership or other legal person governed by the law of a country or territory outside the UK.

Who is exempt from the Bill?

The Bill itself does not spell out exactly which entities are to be exempt. However, it is proposed that categories or individual entities will be laid out in secondary legislation by the Secretary of State. The following entities may be exempt:

• foreign governments
• trusts
• individuals.

What does the Bill require?

The Bill requires registrable overseas entities to identify their beneficial owner(s), be that an individual, legal entity or government. One or more of the following conditions must be met for a person to be a beneficial owner:

• owning more than 25% of the shares
• holding more than 25% of the voting rights
• a right to appoint or remove majority of board of directors
• a right to exercise significant influence or control
• being a trustee of a trust or a partner of a non-legal entity which meets any of the above conditions.

Although trustees themselves may be considered to be beneficial owners of an overseas entity, trusts expected to be exempt.

Identification of an entity will involve provision of details such as the registered office, address for service and law by which it is governed. This information is to be updated annually. In England & Wales, it only applies to interests first registered on or after 1 January 1999.

When is the Bill likely to come into force?

It is estimated that the Register will operate by 2021. The EU's Fifth Anti-Money Laundering Directive is to be transposed into national law by January 2020 and the UK has confirmed that the Bill will implement this regardless of the political circumstances surrounding Brexit. The purpose of the Directive is to make beneficial ownership registers public.

Once the Bill comes into force, there will be an 18 month transitional period for entities to submit the required information to the Register in relation to any interests acquired on or after 1 January 1999.

What are the consequences of failing to comply with the Bill?

The "teeth" of the Bill are in the sanction that a failure to comply with the Bill can result in a restriction on overseas entities from registering dispositions (eg purchasing, selling and letting).

In addition, the Bill imposes a daily fine of £500 where there is a failure to update the Register and can also impose criminal liability where there is a failure to register/update or disposition of property is made that is incapable of being registered.

Key issues from the report

A number of issues arose from the recommendations provided in the report, including:

• lowering the 25% ownership and voting thresholds for the definition of a registrable beneficial owner
• requiring the Register to be updated before any disposition of UK land
• introducing civil penalties
• trusts being exempt, although the Government intends to address this via the Trust Registration Service
• a lack of verification of the information provided
• sanctions preventing the registration of certain dispositions, which could have an unfair detrimental impact on an innocent purchaser.

Our thoughts

The Register has the potential to transform the system by affecting the nature of buying and selling property, thus changing the structure of investment. The prospect of the Register will be supported by those who favour transparency but may be opposed by those who welcome unrestricted foreign investment.

However, the Register proposed by the Bill does not operate in isolation. It is considered to be only one piece of the jigsaw in the UK's anti-money laundering measures; it relies on other anti-money laundering measures such as Unexplained Wealth Orders and the People with Significant Control Register.

Furthermore, there are inherent limitations with the Bill, which will hopefully be addressed before it becomes law.

Due to the political uncertainty, it is unknown whether implementation of the Register will meet the 2021 target. Nevertheless, it appears that the Bill is likely to be passed.

Overseas entities with land in the UK are recommended to review their portfolios and conduct preliminary investigations in anticipation of these upcoming changes.