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Economic Crime and Transparency Bill: Closing a loophole in the overseas entities register

Posted on 21 September 2023

Updated on 14 March 2024

It has been just over a year since the Economic Crime (Transparency and Enforcement) Act 2022 came into force for real estate transactions. The Act requires overseas entities which own qualifying UK land to register details of their beneficial ownership at Companies House. 

Until 4 March 2024, the 2022 Act did not require the ultimate beneficial owner of a property to be disclosed, but only the beneficial owner of the overseas entity which owned the property. If Y (an overseas entity) held land as nominee for X (a beneficiary), only the owners of Y needed to register their details at Companies House. Although details of X would have been disclosed to HMRC via the Trust Registration Service, that trust information was not available publicly

An important change has now been made to the Act as part of the Economic Crime and Transparency Act 2023 (the "2023 Act"). Most of the 2023 Act relates to UK companies, but it contains one notable amendment affecting overseas entities. This expands the definition of "beneficial owner" to include someone (X) for whom an overseas entity Y (as registered proprietor) holds the property as nominee.

This amendment came into force on 4 March 2024 and means that details of X will now need to be disclosed publicly on the overseas entities register as beneficial owner. If X has an interest in Y, then X must also be disclosed if X holds more than 25% of the beneficial interest in Y, or otherwise exercises significant control over Y.

It is not surprising that this amendment has been made, as there has been some criticism of the apparent lacuna for trust arrangements since the 2022 Act was rushed through Parliament. It will, however, have implications for many property investors who until now were able to remain off the public register.

New retroactive requirement

The 2023 Act also introduces a new retroactive requirement to provide details of any changes in beneficial ownership (including information regarding trusts) which occurred between 28 February 2022 and 31 January 2023. Any restructuring that was undertaken during this period is likely to be caught by the new requirement. Detail on how to register this information requires secondary legislation that has not yet been published but we will keep you updated.

Greater powers of enforcement

Initially, there had been relatively little enforcement action taken against overseas entities which had failed to register. A report published by the LSE, University of Warwick and the Centre for Public Data in September 2023 found that between 9,000 and 13,000 properties appeared to be owned by companies which had failed to register on the overseas entities register.

However, as a result of regulations which came into force in June 2023, Companies House now has the power to directly levy civil financial penalties for breaches of the Act. This is much easier and quicker than bringing criminal proceedings in the courts, so should (at least in theory) lead to an increase in enforcement action.

If Companies House suspects that an offence has been committed, it will issue a warning notice. The entity then has 28 days to register, comply with its updating duty or provide an explanation. If the entity owns more than one property, a penalty will be charged in respect of each property in its portfolio.  

The penalty is £10,000-£50,000 per property, plus interest at 8% on unpaid amounts. These penalties are civil, not criminal, but the value of an entity's property portfolio will be used to estimate the size of the harm. So for a large property portfolio, hefty sums could soon rack up. If a penalty is not paid, Companies House can seek to enforce the debt through the courts.

Remember the updating duty

Those overseas entities which are already registered must remember to comply with the annual updating duty. 

The entity must update details of its beneficial ownership at Companies House within 14 days of each anniversary of its registration or the last update. If there has been no change to the beneficial owners, then there is no requirement for this information to be formally verified.  

If an entity fails to comply with the updating duty, it commits a criminal offence and its ability to deal with the property is suspended. This obligation is therefore as important as the initial duty to get registered and may cause some delay in completing property transactions in the coming months.

If you have any queries about the points raised in this article, please get in touch.

Lucy Smith and Kate Foster

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