The government has just released its response to the House of Commons and House of Lords Joint Committee's (Joint Committee) report on the draft Registration of Overseas Entities Bill (Bill). To recap, the Bill sets out a legal framework to establish a public register of the beneficial ownership of overseas entities that have interests in land in the UK (Register) (see previous update). The key point to take away is that the government remains committed to the Register becoming operational in 2021.
Some of the other key points coming out of the government's response include:
- We already knew that the Register would apply to "overseas entities" but the worry has been how this term could and should be interpreted. The Joint Committee had suggested some form of pre-clearance mechanism to allow parties to confirm in advance whether a particular entity fell within that definition and would therefore be subject to the registration requirements of the Bill. The government has rejected that suggestion. It does not believe that it is appropriate for any UK agency such as one of the land registries or Companies House to make decisions on the legal personality of an overseas entity. Instead, the government envisages that the entity itself should know its own legal status (and therefore whether it needs to comply with the registration requirements of the Bill) as would its conveyancers who are already required to carry out a number of checks on their clients.
- The Joint Committee had also suggested that any exemptions from the requirement to register should be set out on the face of the Bill and not left to secondary legislation which would be initiated at the discretion of the Secretary of State. The government has not taken up this suggestion because it believes that setting out the exemptions in the Bill could limit its ability to respond to changing circumstances.
- One area of some uncertainty has been the application of the proposed Bill to trusts. The Joint Committee raised various concerns about this in its report, in particular how the Bill will fit with the UK's implementation of the Fifth EU Anti-Money Laundering Directive. The government has clarified that although trusts will not themselves fall within the registration requirements of the Bill (because they do not have legal personality and so do not meet the definition of overseas entity):
- a trust that generates UK tax consequences (which most land owning trusts do) would be required to register with the existing Trust Registration Service (TRS) which is entirely separate from the Register. The TRS was established by Her Majesty's Revenue and Customs as part of the transposition of the Fourth EU Anti-Money Laundering Directive into UK law and requires certain trusts to provide full beneficial ownership information on their trustees, settlors, beneficiaries and other beneficial owners. At the moment, access to the TRS is restricted to law enforcement bodies though there are plans to broaden this to include individuals who can demonstrate a legitimate interest. Going forward, as part of the transposition of the Fifth EU Anti-Money Laundering Directive into UK law, the government intends to expand the TRS to include discretionary trusts and non-EEA trusts which acquire real estate in the European Union. As such, the actual trust itself will likely need to comply with the TRS;
- any overseas entities that trusts use to own land will be subject to the registration requirements of the Bill in the same way that any other overseas entity would be required to comply. By way of background, a trust, having no legal personality, cannot directly hold land. Instead, the assets of the trust are vested in trustees or some other legal entity and it will be those trustees and/or legal entities that will have to comply with the Register where they are established overseas (domestic entities will generally have to comply with the Persons with Significant Control Regime). This would require such entities to disclose details of their beneficial owners, including any party that has the right to exercise, or actually exercises, significant influence or control over the activities of that entity.
- The Joint Committee reported that there were concerns that the 25 per cent ownership and voting threshold for the definition of beneficial ownership in the Bill was set too high and might fail to capture the true beneficial owners of overseas entities. The government did not agree, noting that the threshold is in line with global norms in beneficial ownership. As such, this threshold is unlikely to change.
- As currently drafted, the Bill proposes that there should be an obligation on the relevant overseas entity to update the information kept on the Register annually. The Joint Committee suggested that in addition there should be a specific requirement on the overseas entity to update the Register before any disposition is made. The government has not completely rejected this suggestion stating that it will consider further how best to achieve the aim of ensuring the Register is as accurate as possible at the point at which dispositions take place.
- In addition to the two key methods of enforcement envisaged by the Bill (criminal sanctions and restrictions on the ability to dispose of property) the Joint Committee recommended civil sanctions, something the government has also said it will consider further.
Despite the numerous and exceptional calls on its time, it is clear the government is determined to push forward the Bill. Overseas entities with interests in UK land, or an intention to acquire UK land, need to ensure that they will be ready for the Register going live in 2021 if they want to avoid the civil, criminal and practical penalties that would flow from non-compliance.
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