Overseas Investors in UK Real Estate – Implications of the Economic Crime (Transparency and Enforcement) Act

Further to the Fried Frank International Trade and Investment Alert on the UK’s new legislation imposing strict liability for financial sanctions breaches by companies, this note highlights the key changes brought about by the fast-tracked Economic Crime (Transparency and Enforcement) Act (the “Act “) from a real estate perspective.

The Act introduces unprecedented requirements on foreign owners of property in the UK estimated to be in the value of 170 billion. The key developments are (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, and (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 is not a new idea in the UK. Yet despite being first proposed in 2016, which is also when the UK’s PSC register1 was introduced, it has remained a low priority on the legislative agenda until now. However, prompted by the public outcry at the Russian invasion of Ukraine, the UK government has taken extraordinary steps to crack down on the privileges enjoyed by elite Russians in the UK.2 Although 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 eg 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, and such information must be updated every 12 months.

The definition of “beneficial owner” used in the Act is akin to that used in relation to the PSC register required for UK corporate entities, ie it broadly applies to persons owning >25% of the shares or voting rights in an overseas entity, having the right to appoint or remove a majority of the board of directors of the overseas entity, or exercising or being entitled to exercise significant influence or control over that overseas 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 country.

Retroactive scope and deadlines to comply

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, but will also capture any overseas owners that 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 (rather than the 18 months specified in the original bill) to comply with the new registration requirements. The clock will start from the date the relevant section of the Act comes fully into force, and while it remains to be seen how long this will take, given the speed with which the Act was rushed through Parliament, we can expect this will be 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 country, 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 real estate 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.