Original content provided by BDO UK.
On 15 March 2022, the Economic Crime (Transparency and Enforcement) Act 2022 received Royal Assent – the law will become live shortly when regulations are issued. In addition to changing the rules about sanctions and Unexplained Wealth Orders, the Act introduces a new requirement for overseas entities owning UK property to register at Companies House and provide details of their beneficial owners. Criminal offences may be committed by those who fail to comply or who provide incorrect information.
The register will be publicly available, and HMRC will be able to access additional information at Companies House.
Land law is different in Scotland, and the Scottish government also created a similar Register of Persons Holding a Controlled Interest (RCI) in land on 1 April 2022 – read more here.
Why is this happening?
According to Land Registry data, 93,877 properties in England and Wales are currently owned through an overseas entity. Individuals who want to protect their privacy often opt to hold UK property through an overseas company but keeping your name off Land Registry records comes at price: companies must pay Stamp Duty Land Tax (SDLT) at 15% when buying residential property.
Of course, there is nothing wrong with owning UK property through an offshore company - such a structure can be set up for legitimate commercial or personal protection reasons and this is not being blocked by the new rules. The Government’s aim is simply to increase transparency of ownership: it is aware that the previous lack of transparency allowed those who wished to conceal their identify for other reasons (sometimes illicit ones) to invest in UK property. This is why part of the new registration process involves declaring the beneficial owners of the company to Companies House.
What counts as an ‘overseas entity’?
The rules apply to entities governed by law in a country outside the UK, so offshore companies, partnerships and foundations will need to comply. However, offshore trusts owning UK land directly are not required to register with Companies House, as they must already be registered through the Trust Registration Service. Where an overseas structure includes both a trust and an overseas company or other entity, the officers of that entity must ensure that it is registered.
The requirement to register at Companies House will apply where the entity holds freehold property and land, and leasehold granted for longer than seven years. When in force, offshore entities must register before acquisition.
Where registrable land is held through a chain of companies, the general rule is that the overseas entity is required to look up through the structure and determine its ultimate beneficial owners
What are the impacts for overseas entities owning UK property?
This Act builds on the 2016 transparency requirement for corporates to declare which people exert significant influence and control over them at Companies House. The rules will ensure that anyone can identify the ultimate beneficial owner of overseas entities which own UK land interests, and dissuade those planning to buy UK property with illicit funds.
To comply with the Act, the officers of overseas entities must take reasonable steps to:
- Identify any registerable beneficial owners of the entity,
- Obtain and provide the information to Companies House,
- Complete an annual return to update the register
- Request removal from the register at the appropriate time.
Overseas entities must issue ‘information notices’ to all persons that they know (or have cause to believe) are beneficial owners, and the recipient must respond within one month. As with the existing rules on “persons with significant control” of UK companies, share ownership or voting rights of more than 25% of the overseas entity will put someone in the “beneficial owner” category, along with all directors. The Act contains details of exemptions and procedures. Even where the ultimate beneficial owner in an overseas structure is a trustee, details of the trust must be disclosed, and information in relation to any and all beneficiaries, the settlor, and any other individual or entity with control over the trust (for example, a protector) reported.
Failure to register is a criminal offence, and the officers of the entity could face up to two years in jail (or five years in some extreme cases) if they do not comply. Similarly, failure of beneficial owners to supply information can also be a criminal offence under UK law.
The rules also apply to land already owned by overseas entities – ie land in England and Wales purchased since 1 January 1999 (purchases since 8 December 2014 for Scotland). The transitional rules broadly require offshore entities which own such UK property to join the Companies House register within six months of the rules coming into force. Even where the land is sold within this transition period, there are administrative issues. Until an overseas entity owner is registered at Companies House, the Land Registry entry for the property will show a restriction preventing it from being sold (in most circumstances). If a sale occurs after 28 February 2022 but before a company is registered (eg before the regulations are issued or before a restriction is placed on the Land Register), the selling entity still has an obligation to register with Companies House by the end of the transition period. This effectively means all entities must register at Companies House initially, even if they wish to sever all UK connections: after the transition period, the requirement to be registered ceases once all UK owned property is sold, and entities can apply to be removed at that point.
Tax investigations into beneficial owners following registration
HMRC, the police and other enforcement agencies consider that foreign company ownership of a UK property can be used to conceal crimes such as tax fraud and money laundering, so they will take a keen interest in the companies that now register. HMRC will feed the information into its Connect system to cross reference other government data, including the Common Reporting Standard data from offshore banks and open-source data to identify cases for further investigation.
For example, HMRC is likely to investigate if individuals living in property are UK resident for tax purposes. If they are UK tax resident, then UK tax may be due on their worldwide income. HMRC can assess whether there were taxable ‘remittances’ (usually money transfers) to the UK by non-UK domiciled individuals. Questions about the source of funds to purchase property can often arise. Overseas landlords will be taxable on UK rental income. HMRC will also want to check whether any Annual Tax on Enveloped Dwellings (ATED) is due; this is generally payable on residential property with a value of more than £500,000.
Officers of offshore entities affected by these new rules will need to consider their new duties carefully and take steps to comply with them: their UK advisers should ensure that such entities are fully informed of the new rules.
Where there is any question that there may have been non-compliance with UK tax reporting obligations in the past, making a voluntary disclosure to HMRC of all the circumstances is the best way to resolve matters. It is sensible to take expert tax advice on how to do this in the most appropriate way: there may be penalties to pay, but making the disclosure usually helps to reduce these.
For help and advice on this or any other tax disclosure issue, please contact Claire McGuigan.