New register of overseas property owners fast-tracked by UK in response to the war in Ukraine

Russia’s invasion of Ukraine has presented significant political and humanitarian challenges for Western governments; not least of all in terms of how to respond. The NATO countries have been careful to avoid military escalation beyond Ukraine’s borders and countries have provided varying degrees and forms of support to Ukraine. Perhaps the most unified response has been financial sanctions which seek to stifle Russia’s ability to fund the war.

In this process, an international purge is underway to flush, freeze and seize cash and assets that might be linked, or otherwise flow back, to the Kremlin and Putin’s extended sphere of influence.

As part of this the UK has announced new legislation in response to the war, as reforms to the Economic Crime (Transparency and Enforcement) Bill have been fast-tracked in a bid to improve the transparency surrounding overseas ownership of UK property. The idea of this register had been mooted for a number of years as part of the UK’s overall drive to increase its status as an open and honest jurisdiction for business. The current climate has now created the political will to see it become a reality.

A new Register of Overseas Entities (the Register) will require entities that hold land in the UK to identify their beneficial owner(s) and to provide information about them and their managing officer(s) to Companies House. This information must then be updated and maintained on an annual basis in accordance with the law.

It is expected that the scheme will follow a similar template to that used for the register of ‘persons with significant control’ of a UK company, as it aims to establish a level playing field between UK companies that already report to Companies House and those based overseas.

The term ‘beneficial owners’ has already been outlined in Schedule 1 of the Companies Act 2006, which defines what a ‘person with significant control’ is. For the purpose of the Register, a person or entity must meet one of the following conditions to be classed as a ‘beneficial owner’:

• They hold, directly or indirectly, more than 25% in the overseas entity or the voting rights in the overseas entity
• They hold the right to appoint or remove the majority of a board of directors at the overseas entity
• They have the right to exercise significant influence or control over the overseas entity
• They are trustees of a trust, members of a partnership, unincorporated association, or other entity which is not a legal person under the law by which it is governed; and they have the right to exercise, or actually exercise, significant influence or control over the activities of that trust or entity

Anybody found to be submitting information that is false or misleading, could find themselves facing a fine or even a two-year prison sentence.

Once information has been submitted to the Companies House, the entity and its officers must ensure records are updated annually, as the submission of inaccurate information could lead to fines being issued, with a daily default fine of up to £500 if the problem is ignored.

When the disclosure of information to the Register becomes law, it will have a retrospective effect and will apply to property bought in England since 1999 and to property purchased in Scotland since 2014.

An 18-month transition period has been proposed which comes into effect the day the Bill becomes law, providing entities with enough time to ensure historic transactions are placed on the register.

The new rules should not be taken lightly as entities face an increasing scale of punishment for failing to comply. To begin with a notice would be issued to the offending foreign entity that requires it to register within six months. If this is unsuccessful, a fine will be levied on the overseas entity and potentially every officer involved could face a prison sentence of up to two years.  Additionally, those who fail to retrospectively place themselves on the register will face major restrictions in dealing with the property itself e.g. they will be prohibited from selling the property.

Whilst these reforms are intended to improve the current situation, there is still a lot of uncertainty about how the law will be applied and enforced. For example, it is unclear what the register means for lenders that lend to foreign entities and take security over their property – do the reporting obligations extend to them? Questions such as this will need to be answered as part of the implementation process.

The introduction of a strict register will undoubtedly create additional work for the Companies House and extra funding will be needed to ensure everything runs smoothly and entities take the changes seriously.

All those involved in the investment and funding of property must do all they can to ensure compliance if they want to avoid serious financial punishment or the curtailing of their property rights.