The drive for greater transparency - Who owns that property?02 May 2017
UK Government issues call for evidence on beneficial ownership register of non-UK ownership of UK property
The UK Government published a proposal on the 5th April 2017 and is seeking views on a beneficial ownership register to increase the transparency of overseas investment in property (and a similar review is being undertaken in respect of public contracts). This call for evidence sets out proposals for a new register of overseas beneficial owners of UK property which would become mandatory for many overseas investors.
In summary, the plans recommend a new register be kept by Companies House which will operate in parallel to the existing register regarding 'people with significant control' (PSC) for UK companies. Established in June 2016, the PSC register is a central, publically accessible register of ownership and will be fully populated by July 2017. Conversely the new proposal looks to address overseas owners who either own, buy or sell UK property.
The proposal may result in overseas investors being unable to buy or sell property in the UK unless they have provided the required information. This may include a note placed on the title at HM Land Registry to that effect restricting the registered owner's ability to sell, lease or mortgage the property where it has not complied with the new law.
The full report can be accessed here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/606611/beneficial-ownership-register-call-evidence.pdf
As currently proposed existing overseas beneficial owners of UK properties would have a period of 12 months from the introduction of the register to either comply with the requirements to register their details, or to sell the underlying property.
It is worth noting that entities incorporated in overseas countries with equivalent publicly available registers would be exempt from the need to register in the UK. Comparatively, recent EU legislation is introducing the requirement for companies and other legal entities incorporated in EU member states to keep a register of beneficial owners by June 2017. This requirement is an extension of the 4th Money Laundering Directive. However, unlike the publicly accessible PSC register or this proposed new UK property scheme, the EU register is only available to specific authorities and organisations across the EU. Therefore this law would not exempt EU companies from the imminent beneficial ownership register in the UK.
If the new proposals are adopted in their current form, a beneficial owner of an overseas entity will be defined as a person who:
- directly or indirectly holds more than 25% of the shares (or voting rights) in the company;
- directly or indirectly holds the power to appoint or remove a majority of the board of directors of the company;
- otherwise has the right to exercise or actually exercises significant influence or control over the company;
- has the right to exercise or actually exercises significant influence or control over a trust or firm that is not a legal entity, which meets one or more of the above conditions.
What impact will this have on overseas investors?
This measure as proposed will increase the burden on overseas investors when planning to invest in the UK property market. Some investors, especially where confidentiality or privacy is of the up-most importance, may see this development as a potential deterrent. Others may require administration support during the process.
The chief aim of establishing a transparent register is to protect against illegal activity via corporate vehicles attempting to hide illicit funds via UK property investment. Such improved transparency is a good thing and an environment which is attractive to investors targeting less corrupt and more transparent markets.
However, not all investors will share this positive view on transparency. Measures have already been addressed within the proposal to protect those investors with a risk of public exposure. Comparable to the PSC register, a protection regime is proposed to be implemented to withhold information that would pose a high risk if made publicly available, such as residential addresses. In these instances such information would be made available only to enforcement agencies. It is believed that this provision will result in there being little if any impact on deterring overseas investors from investing in UK property. But does this go far enough? There are other legitimate commercial or personal reasons why an investor might seek anonymity. How will they exercise their right to privacy?
The UK economy is currently the number one destination for foreign investment in the EU. As such the UK government is conscious of the potential economic impact that a central register could have. Consequently, they propose to commission research into the influence that their proposal could have on those looking to invest into the UK, and the impact on the UK economy. This research would form part of the Impact Assessment due for publication in conjunction with the proposals when they are introduced into Parliament.
The consultation process remains open until 15 May, so it is expected that the current proposals may be subject to further amendments. But the time to act is now. The UK Government is committed to ensuring that the UK property market is transparent and endeavours to remain at the forefront of leading the world on improved corporate transparency for the prevention of corruption. This follows on from the PSC register which was one of the first of its kind. With little benchmarking, other than the efforts in the United States by the Financial Crimes Enforcement Network (FinCEN) who have issued Geographic Targeting Orders (GTOs) to US real estate markets, will the UK introduce a legislative model for emulation worldwide?
 Shanh-Jin Wei (1997) in ‘How Reluctant are Nationals in Global Integration?’ Kennedy School of Government, Harvard University; unpublished but quoted in ‘Gauging the Investment Potential of International Real Estate Markets’ by Stephen Lee (2005); http://centaur.reading.ac.uk/20959/1/1905.pdf; https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/565095/beis-16-38-4th-money-laundering-directive-transposition-discussion-paper.pdf, p.9.
 ibid. p.39-40.
 ibid. p.19.
 ibid. p.11.