Summary
The Economic Crime (Transparency and Enforcement) Act 2022 has set up a new Companies House register for overseas entities that own certain property registered at the Land Registry in England and Wales or the Land Registers of Scotland or Northern Ireland. The Companies House register contains information about the entity and its beneficial owners and the Act impacts on real estate transactions and their registration. There is an important deadline on 31 January 2023 for applications to Companies House to register on the new register and failure to do so may lead to criminal penalties. This Law-Now provides a reminder via a Q&A of the impact of the new legislation on real estate transactions and their registration at the Land Registry and the key elements of the Companies House application. While the Act affects the UK, this Law-Now does not cover Northern Ireland.
Detail
1. What does the Economic Crime (Transparency and Enforcement) Act 2022 (“Act”) do?
The Act set up at Companies House a register for overseas entities that own certain property registered at the Land Registry or Land Register of Scotland. The register contains information about the entity and its beneficial owners. The Act forms part of the UK Government’s strategy to combat economic crime and to crack down on overseas criminals using UK property to launder money. The Act impacts on real estate transactions and their registration. The Act affects the United Kingdom, but these FAQs do not consider the position for Northern Ireland.
2. Is all property affected?
No. For England and Wales, it affects freeholds and leases for more than 7 years that are or will be registered at the Land Registry in the name of an overseas entity. The Act does not affect properties where the overseas entity became the registered owner before 1 January 1999.
For Scotland, it affects leases for more than 20 years and heritable interests that were registered in the Land Register of Scotland on or after 8 December 2014.
3. Who is impacted?
An overseas entity which owns or is applying to register ownership of affected property. Any funder to such an entity. Any party entering into certain property transactions with the entity. The entity’s officers.
4. Which transactions are affected?
For England and Wales - transfer of a freehold or a lease for more than 7 years; a legal charge; and a grant of a lease for more than 7 years.
For Scotland – a disposition (transfer of heritable interest); a grant of a long lease (over 20 years); the assignation of a long lease; the grant of a standard security; an application for voluntary registration; and a notice of title.
5. What does an overseas entity include?
A body corporate, partnership or other entity that is a legal person governed by the law of a country or territory outside the United Kingdom. This includes Jersey, Guernsey and Isle of Man entities. Overseas individuals owning UK property directly or through a UK entity are unaffected.
6. How does this affect an overseas entity purchaser or tenant?
For England and Wales - An application to register an affected transaction made to the Land Registry from 5 September 2022 will be cancelled if the overseas entity is not already registered on Companies House’s register of overseas entities. A cancellation increases the possibility of other transactions affecting the relevant property being registered at the Land Registry in priority to the entity’s purchase or lease or related funding.
For Scotland - an application to register an affected deed will be rejected.
7. How does this affect a funder to an overseas entity purchaser or tenant?
If the application to register the relevant charge is made to the Land Registry or Land Register of Scotland from 5 September 2022, the purchaser or tenant entity must be registered on Companies House’s register at the time of the charge and also at the time of the application to the Land Registry or Land Register of Scotland.
8. How does this affect an existing overseas entity owner of relevant registered property?
The entity must apply to be registered on the Companies House register before 1 February 2023. Details must also be provided to Companies House of any transfer, legal charge or lease for more than 7 years (or more than 20 years for Scotland) entered into since 28 February 2022 and before 1 February 2023. In view of the deadline for application for registration at Companies House by the end of January 2023, it is important that, where required, relevant parties ensure that applications are made to Companies House in the course of January to seek to avoid any adverse implications for real estate transactions and to avoid incurring a criminal penalty (see question 14 below). In England and Wales, the Land Registry has (in most cases) entered a restriction in relation to the Act on an existing title to an overseas entity’s registered property.
9. What does the restriction on title at the Land Registry do (for England and Wales)?
It prohibits any registration from 1 February 2023 of any transfer, legal charge or lease for more than 7 years unless an exception applies, in particular, that the entity was registered on the Companies House register at the time of such transaction. There is an equivalent restriction for when an overseas entity purchaser or tenant is registered with a new title, but the restriction takes effect immediately. It is crucial for relevant parties to ensure that, where the restriction has effect, the overseas entity was registered on the Companies House register at the time of the relevant transaction that is to be registered at the Land Registry and would potentially be impacted by the restriction. This is likely to be the most important exception from the prohibition under the restriction, albeit there are other exceptions such as the relevant transaction was made pursuant to a contract made before the restriction was entered on the title, or was made in the exercise of a power of sale or leasing conferred on the proprietor of a registered charge or a receiver appointed by such a proprietor.
If an overseas entity, that is entitled to be registered at the Land Registry but is not so registered, transfers, grants a legal charge or lease for more than 7 years, there is an equivalent prohibition on registration with exceptions.
If an overseas entity makes a disposition (i.e. transfer, legal charge or lease for more than 7 years) where registration of that disposition is prohibited as set out above, while the disposition itself remains valid an offence is committed with a potential criminal penalty (see question 14 below).
10. What does the Companies House registration involve?
- Providing prescribed information about the entity, its registrable beneficial owners (including, where a registrable beneficial owner is a trustee, about the trust) and, where applicable, its managing officers, and also about certain transactions (see question 8 above).
- A so-called “supervised agent” (known as a “relevant person” in the Act) must have verified the information. The supervised agent must be independent of the entity and beneficial owner and must be a business carried on in the United Kingdom. The agent can include credit and financial institutions; auditors, insolvency practitioners, external accountants and tax advisers; independent legal professionals; trust or company service providers; and estate agents and letting agents, with certain exceptions. Some UK law firms will not provide the verification statement due to concerns about the process, but there are a number of providers of this verification service in the market.
- Before application is made to Companies House, the entity must give an information notice to each beneficial owner requiring them to provide and confirm certain information. The beneficial owner has up to one month to respond.
11. Who are the registrable beneficial owners?
In broad terms, anyone who:
- holds, directly or indirectly, more than 25% of the shares or voting rights in the overseas entity;
- holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of the overseas entity;
- has the right to exercise, or actually exercises, significant influence or control over the entity; or
- has the right to exercise, or actually exercises, significant influence or control over the activities of trust, partnership or other non-legal entity, where the trustees or members of such trust, partnership or other non-legal entity meet any of the above in relation to the overseas entity;
and who is considered ‘registrable’ under the regime.
The analysis of ownership structures for the new register broadly follows the UK’s Persons of Significant Control regime. Each entity will require its own analysis.
12. Will the information at Companies House be publicly available?
The contents of the register will for the most part be available to the public, except for the day of the month of any birthdate, residential and email addresses, required information about trusts (although it may be shared with HM Revenue & Customs) and any information specifically protected by application to Companies House.
13. What does the entity receive for its registration at Companies House?
An overseas ID which must be provided to the Land Registry or Land Register of Scotland to enable registration of transactions. The Companies House information must be updated annually and failure to do so will invalidate the ID.
14. Are there sanctions for non-compliance with the Act?
Yes, including criminal sanctions both for the entity and its officers, punishable by a fine and/or imprisonment of up to 5 years.
15. What is the time criticality?
There is a time criticality because of the 31 January deadline for applying to register at Companies House and the possible criminal penalties for failing to do so. Statistics show that there are many overseas entities that have still to apply for registration and with such a short time to go, there are concerns that many entities may fail to apply in time or that applications may be rejected by Companies House. It is, therefore, crucial for relevant parties to ensure that where such applications to Companies House have yet to be made, they are made as soon as possible. There is also the potential consequential impact on registration of transactions at the Land Registry. There is likely to be a spate of applications to the Land Registry during the course of January to register transactions in order to seek to avoid the impact of the restrictions that have effect from 1 February 2023 (see question 9 above) and this may create delays in the Land Registry processing the application.
16. Further legislative change?
A new Economic Crime and Corporate Transparency Bill Economic Crime and Corporate Transparency Bill - Parliamentary Bills - UK Parliament is in the course of going through Parliament that, among other matters, makes changes to aspects of the Economic Crime (Transparency and Enforcement) Act 2022.
