There is new UK legislation imposing strict liability for financial sanctions breaches by companies. We consider the impact of the Act on real estate and overseas investors.
Recent legislation introduces unprecedented requirements on foreign owners of UK property. The market for overseas investors in UK property is estimated to be in the value of £170 billion. The key developments of the Act are threefold:
(1) All non-UK entities that own or acquire real property in the UK will need to register the entity’s beneficial owners.
(2) The requirement to register will apply retrospectively, from 1999 in England and Wales and from 2014 in Scotland.
(3) Failure to comply will result in (a) limitations in subsequent transfer/security rights, as well as (b) criminal sanctions for the entity and its officers. The provisions will come into force upon the adoption of further secondary legislation, expected shortly.
A register of foreign ownership was first proposed in 2016, which is also when the UK’s PSC register1 was introduced. It had remained a low priority on the legislative agenda until recent events in Ukraine.
In response to the public outcry at the Russian invasion of Ukraine, the UK government has taken huge steps to crack down on the privileges enjoyed by Russians elites in the UK. Whilst the register of foreign ownership will apply to all foreign nationalities, the timing of the Act is clearly directed at Russian ownership taking aim at “Londongrad”, the tongue-in-cheek moniker for Russian money laundering operations in the UK capital.
We consider the requirements in detail below.
Any entity that is not UK incorporated is caught
The Act applies to overseas entities (being any body, corporate, partnership, or other entity that is a legal person governed by the law of a country outside the UK, including e.g. any Jersey or Guernsey entities), including their beneficial owners, who hold freehold titles or leasehold titles of longer than seven years in England and Wales (or ownership and leases of more than 20 years in Scotland) (a “Qualifying Estate”).
What is required of overseas investors?
The Act establishes a new Register of Overseas Entities, to be held and maintained by Companies House, with support from UK Land Registries (the “Register”). Any overseas investor who holds a Qualifying Estate in UK property or who plans to do so must apply to become a registered overseas entity on the Register. In order to do so, details of its beneficial owners (including the name, incorporation details, principal office, and legal form of the entity, amongst other details) must be submitted to Companies House. This information must be updated every 12 months.
The definition of “beneficial owner” used in the Act is the same as that used in relation to the PSC register required for UK corporate entities. In layman’s terms applies to persons owning >25% of the shares or voting rights in an overseas entity, or having the ability to control that entity. Once registered, the overseas entity will be supplied with a unique ID number, which will enable it to deal with its interest in the land.
The primary object of the Act, through the greater transparency created by the Register, is to prevent individuals and businesses based overseas from using UK real estate to launder money. The Register will not just apply to future acquisitions of interests in UK land. the register will also capture any overseas owners which have owned land in England and Wales since 1 January 1999 or that have owned land in Scotland since 8 December 2014.
Transitional provisions will allow overseas entities that already own Qualifying Estates, a grace period of up to six months to comply with the new registration requirements. The clock will start from the date the relevant section of the Act comes fully into force. Whilst it remains to be seen how long this will take, we can expect this Act will be implemented shortly.
Criminal sanctions and restrictions on transfers/charges
Failure to comply with the requirement to register could result in restrictions on the ability to transfer or charge the land, or to grant a lease of more than 7 years, unless the overseas entity is exempt. The overseas entity, together with every officer of the overseas entity, will be committing a criminal offence, punishable by up to five years’ imprisonment or a daily fine of 2,500 for continued contravention or both.
Next steps for foreign investors
Given the retrospective nature of the legislation, the potential criminal sanctions, and that the window for compliance has been shortened to six months from implementation, overseas investors in UK real estate should review their property ownership and holding structures to identify their beneficial owners and Qualifying Estates, to best prepare for the changes brought about by the Act.
Long term effects
With the huge amount of money in the UK property market from overseas investors, there is likely to be a impact on the property market. However, the vast majority of inward investment into UK property comes from legitimate sources. Most of this illegal investment is concentrated in the high end of the London property market. This is where property can be bought and sold for many millions.
Demand from overseas investors
The Buy Association shows that property ownership from overseas investors is up 180% in the last decade. There are figures from the Land Registry showing that almost 250,000 properties are now owned by people who don’t live in the UK. Data from the Centre For Public Data shows that demand from overseas investors is now concentrated in the cities such as Liverpool, Manchester and Leeds. Currently there is a housing stampede in the Northwest of England where property is growing at its fastest rate in 17 years.
For more information on how you can take advantage of the growth in these UK hotspots, look at the listed opportunities on our developments page.