Government responds to call for evidence on the register of beneficial owners of overseas companies and other legal entities

This detailed response to the call for evidence follows the Government’s announcement in January that it plans to progress with the register.

Overview and timings

The Government has now issued its response to the call for evidence which was published in April 2017 concerning the introduction of a public register of beneficial owners of overseas companies and other legal entities that:

  • own or buy UK property, or
  • participate in UK central government procurement,

(the Register).

Commentary on the call for evidence can be found here.

The detailed response follows the Government’s announcement in January that it plans to progress with the Register. The Government highlighted that this will be a ‘world first’ Register and it is intended to build on corporate transparency and “to crack down on criminal gangs laundering dirty money in the UK”.

In the response, the Government has confirmed its plans to publish a draft Bill for ‘scrutiny this summer’ and its intention that the Register go live by 2021. It was noted in a written statement in January that:

"This will be a significant piece of legislation that delivers a streamlined policy, consistent across the UK, where currently the Land Registries for England and Wales, for Scotland and for Northern Ireland have taken different approaches to land registration and registration of overseas entities".

The Government response in detail

The response notes that a downside of being the first of its kind is that the Government does not have an existing model from which to work. As a result, it has stated that it will “proceed cautiously, striking the right balance between improving transparency and minimising burdens on legitimate commercial activity”. Some points of note from the Government’s response are set out below.

Key point Commentary
All legal entities which can hold property are to be within the Register’s scope.

The response states that the “Government intends that all legal forms which can hold properties will be within the scope of the new register’s requirements, while ensuring that there is flexibility in the regime to permit exemptions for types of entity if this seems appropriate (eg to reduce burden where there is already transparency of beneficial ownership information)”.

Although several responses to the call for evidence suggested that trusts should be included in the Register, the Government’s position is that these are “typically used by private individuals for managing family owned assets including for minors and vulnerable family members” and “publishing these persons’ details would not be proportionate and effective especially as disclosure would undermine family confidentiality”. The response states that the Trust Registration Service should allow law enforcement to "identify who owns and benefits from trusts".

The Register is to apply to all overseas legal entities who own leasehold property which requires registration.
In the original consultation it was proposed that the Register will apply to those who own leasehold property where the lease is required to be registered and the original term is for more than 21 years. However, after reviewing responses to the call for evidence, the Government will be proceeding on the basis that the register will apply to all those who own leasehold property which requires registration. This will lead to different approaches in relation to leasehold property across the UK: in England and Wales this will be all leases over seven years, in Scotland it will be leases over 20 years and in Northern Ireland it will apply to leases over 21 years.
The definition of beneficial owners will reflect the approach in the People with Significant Control (PSC) regime and the information on the new register will be the same as the information required under the PSC regime.

The response confirms that the definition of beneficial owners will reflect the approach in the PSC regime as will the information required about those beneficial owners.

For further information on the PSC register requirements, please see the following articles on elexica:

The Government has commissioned research on the impact of the new register on overseas investment in the UK property market.
The response notes that the majority of respondents to the call for evidence thought that the new register could have a negative impact on the UK property market by deterring overseas investors and making the UK property market less competitive on a global level.
The call for evidence proposed a one year transitional period for those overseas entities that already own UK property to disclose or dispose - this will be extended.
The Government does not specify by how long the transitional period will be extended. The response notes that it intends “to strike a balance which ensures overseas entities have sufficient time to comply or sell the property while ensuring that the policy’s underlying objective is achieved in a reasonable timeframe”.
Compliance will be enforced by a system of statutory restrictions back up by criminal offences for those who fail to comply.

The call for evidence outlined the Government’s intention to introduce a statutory restriction preventing overseas entities from dealing with property in the UK unless they have provided information about their beneficial owners in the new Register, for which they will receive a registration number. The dealings which look to be caught are buying, selling, certain lettings and using the property as security for a loan and this restriction would appear on the title to the property.

Failure to keep information up to date will be a criminal offence.

The Government intends to allow the beneficial interest but not the legal title to pass to an overseas legal entity that does not have a valid registration number at completion (or in Scotland settlement).

The call for evidence included a proposal that a transfer by an overseas seller would be void if the overseas entity was not compliant with the Register requirements at the time the contract completes. In its response the Government notes that the majority of respondents pointed out that this would not work within the broader framework of land law and that it could have damaging consequences for innocent third parties.

The Government is not therefore proceeding with this proposal. Instead, it proposes to stop only the legal title passing by preventing registration of the transaction without compliance with the requirements of the Register. The response states that “the Government intends to allow the beneficial interest but not the legal title to pass to an overseas legal entity that does not have a valid registration number at completion or settlement”. It is not clear from this statement whether if an entity which was not in compliance at completion but which then subsequently complied, would be able to then go on to complete its registration of the property to allow legal title to pass.

If an overseas entity wishing to enter into a UK government contract valued at over £10m is the preferred supplier, it will need to provide beneficial ownership information as a condition of being awarded the contract.

In the call for evidence, the Government set out three options in relation to the provision of beneficial ownership information for overseas entities wishing to bid on UK Government contracts. Two of the options required beneficial ownership information from all bidders and one option required the information from the preferred supplier only.

The Government has gone with the option which will require the preferred supplier to provide its beneficial ownership information as a condition of being awarded the contract. In the response, the Government notes that they were not going to seek the information from all bidders “as it remains concerned that requiring the information from all bidders may be disproportionate to achieving the policy aim of knowing more about the suppliers Government is doing business with.”

Entities unable to give information about their beneficial owners will be asked to provide information about their managing officers.
The Government notes that it considers it important to ensure that there will always be at least some additional information on the control of overseas entities that are subject to the new Register.
The frequency with which the Register is to be updated will be set out in the draft legislation.
The Government originally suggested a requirement to update the information at least once every two years but respondents felt this was too long a period. The response notes that the Government is considering increasing the frequency of the update and that its preferred approach will be set out in the draft legislation. However, the response notes that the Government is not seeking to adopt event driven updates to the Register - the response notes that the Government requires an element of predictability.
Third party protections.

The Government originally suggested that the advance of new money by a lender on the security of a property would not be possible where the borrower had not complied with the new requirements, although it stated that it needed to ensure that existing lenders were not disadvantaged. The response does not address this issue.

The Government was concerned that a beneficial owner of a property might take security over the property, and dispose of it using its mortgagee’s remedies, in an attempt circumvent the application of the requirements. Accordingly, it suggested the introduction of a concept of an accredited or legitimate lender which, alone, would be able to exercise enforcement remedies. The response notes that a clear majority of respondents did not consider a definition of a legitimate lender to be workable and that “the Government has come to the view that such a distinction would be impractical to create and implement.” It is not clear from this statement whether it is only the concept of a legitimate lender which is to be abandoned or whether the Government intends to abandon any restriction on enforcement.

Overall, the response says little about the impact which a non-compliant borrower may have on the rights and remedies of a third party (such as a secured lender).

The Government is confident pre-existing contractual and statutory rights (such as options, off-plan purchases and co-ownership) will be protected. It is developing the policy to ensure it is compatible with insolvency practitioners.
It is likely this response will be subject to further scrutiny once the draft Bill is published.

Comment

The Government’s response makes it clear that they are keen that the UK leads the way with the introduction of the Register. Both the draft Bill and the Government research on the impact of the new register on overseas investment in the UK property market will be anticipated with interest.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.