Register of Overseas Entities – Early Warning for UK Property Market
Overseas entities own 93,300 properties in the UK. Under new rules all of these overseas entities will be required to register with Companies House. Failure to do so will mean not being able to buy or sell the property, as well as fines that could amount to close to £1m per annum. However, it’s not just overseas entities that should pay close attention to the new rules but all those involved in the UK property sector that could be impacted.
A brief recap
The UK Government introduced the Economic Crime Act 2022 with the aim of increasing transparency and fighting financial crime. To recap, overseas entities that own property or land in the UK must register with Companies House and provide details of beneficial owners in order to obtain an Overseas Entity ID. Only with this ID will they then be able to register property transactions with HM Land Registry. Failure to comply could lead to a fine of up to £2,500 a day.
Overseas entities that already own property or land have until 31 January 2023 to comply with the rules. However, the deadline for those overseas entities that currently have a live deal is much sooner. These entities will have until 5th September to register their transaction with HM Land Registry. If they miss this deadline they will then not be able to register without an ID.
The challenges of complying
In order to meet the January deadline Companies House will need to register, on average, 240 entities a day. The average for August is just 8 a day. There’s more at play than the uncharacteristically hot British summer we’re experiencing that has led to the slow start. There are several reasons why overseas entities are not finding it straightforward.
Firstly, there is a provision in the new rules that is relatively new in the UK compliance world that requires information that is supplied to the register to be verified by a UK regulated agent, which includes accountants, law firms and estate agents amongst others. The issue is that verification isn’t a straightforward process. Whereas the UK property market will be familiar with Anti-Money Laundering (AML) practices, this is different and there is no risk-based approach. Verification would require a detailed review of evidence of beneficial owners that could possibly come from any one of over 150 jurisdictions, some of which will have public registers but many that won’t. As if that wasn’t challenging enough there’s also criminal penalties for getting it wrong. For this reason, it’s not surprising that the Law Society and ICAEW, the institute for chartered accountants, has warned its members to proceed with caution.
Once an overseas entity has found an agent. The entity will need to identify all its beneficial owners. This isn’t always straightforward, especially if there are trusts, fund or complex corporate structures and the true answer isn’t always what the company thinks. In particular, it is worth mentioning for trusts the law says that all current and past trustees must be verified, all the way back to day 1, even if they are deceased.
In summary, overseas entities that are acquiring UK property should take action right away and speak to a UK regulated agent. Even if your transaction completes before the 5th September deadline if your Land Registry application is submitted on or after the 5th September deadline you will not be able to obtain legal title. If there is any risk, you should use the time that you still have to get one.
For those overseas entities who currently own existing property or land, there is still some time until the January 2023 deadline but as we’ve seen perhaps not as much time as you may think depending on the complexity of your ownership structure and how quickly you can find a UK regulated agent to support.
It is also worth noting that the requirement to register is not confined to the purchase or lease of property. At Elemental Cosec, as UK-regulated agents, we have already come across instances where lenders are asking for registration before agreeing to financing or refinancing deals.
What all those in property need to be aware of
With over 93,000 properties in the UK owned by overseas entities, there will be knock on effects for other buyers and those leasing from overseas entities. Given the slow start the register has got off to and the further challenges overseas entities may face in obtaining an ID, any current deals that may be affected should be reviewed.
In our own experience the verification process for a simple structure takes a couple of days. The operative word being simple. It then takes a few hours to complete the registration with Companies House.
That is how things currently stand with so few applications being made. Companies House processes still seem manual, and it is yet to be seen how quickly they will be automated and how soon they will be able to deal with the numbers that need to be registered.
Once deadlines have passed if the overseas entity you are dealing with does not possess an ID the deal will not be able to go ahead. Although in theory the sale of property comes under the 31 January 2023 deadline, we are also aware of instances in which purchasers are requiring registration now before agreeing to proceed. If you are currently dealing with an overseas entity you may also want to ensure that that they are actively taking steps to register and produce evidence of registration. This could be supported by additional contractual warranties and undertaking which your legal experts can advise you on.
With such a large number of entities affected and a slow start to the register, if everyone leaves the process to the last month there could be a major backlog. If you are directly or indirectly affected, now is a good time to heed the early warning signs and act now.
This article was written by Nick Lindsay, a solicitor and director of Elemental CoSec. Elemental are a UK-regulated agent who are providing verification services for the register of overseas entities.