New UK legislation requiring overseas entities holding UK property to obtain a certificate of registration from a new central register from August 1st, 2022, has been approved by Parliament. Overseas entities will be able to gain a certificate of registration for free. However, failure to comply with the requirements will trigger severe penalties of up to two years in jail or unlimited fines. Whilst this is already in force, further real estate provisions relating to restrictions on dealing with UK property are due to be released on September 5th, 2022.

What prompted the introduction of this legislation?

The new rules are designed to increase transparency, combat money laundering, and corruption, and impede tax evasion. Offshore entities have been commonly used by non-domiciled individuals for privacy and security but also to mitigate inheritance tax (IHT). It is estimated that more than £170bn worth of UK situs assets is held by offshore shell companies in tax havens such as the British Virgin Islands (BVI), so this legislation will make it easier for HMRC to collect their 40% IHT on the death of any beneficial owners of UK situs assets, regardless of their residence, domicile or the structure in which their property is held.

How can you become a registered foreign entity?

In order to register a new company, you must complete certain forms and submit them to Companies House. One of the forms required is the Channel Islands Company Information Form which must be filled out by each director and beneficial owner of the company. A beneficial owner is, broadly, a person who owns 25% or more of the shares or voting rights in that entity, or a person who has a right to appoint or remove a majority of the board of directors, or who exercises significant control or influence over the entity.

What steps should you take to address this situation?

Here are some actionable steps to take based on the type of entity you are categorized under:

1. If you are acquiring UK property (and wish to hold legal title), you must register with the UK’s Land Registry. Overseas companies and individuals must register with the Land Registry by completing a Statutory Form of Application no later than 12 months after their acquisition. The Land Registry will reject any application on certain grounds set out in the Land Registration Act 2002, such as inaccuracy in the information provided on the application form.

2. In order to avoid committing a criminal offense, you must register as a UK landowner by January 31st, 2023. After that date, you will have to obey the annual updating duty.

3. To make a disposal of a UK property that you currently own, you should register as a non-resident landlord with the Land Registry before February 1st, 2023. You should also gather information about dispositions of UK properties that you have made since February 28th, 2022, and any dispositions that you make up to January 31st, 2023. This is because details of such dispositions will need to be submitted to Companies House, even if you no longer hold any UK property by the end of the transitional period on January 31st, 2023.

4. If you are an overseas lender taking security over UK property, you will not have to register as a registered overseas entity under the Legal Charge Act if you are taking a legal charge over a qualifying estate. However, it is important to ensure that overseas borrowers are compliant with the Act.

5. If you are contracting with an overseas entity, whether or not you are an overseas entity yourself, you may wish to ensure that they register with the appropriate regulatory body and provide evidence of such registration.

UK property held via an offshore company can be subject to various taxes and fees.

Starting in April 2017, an individual’s gross estate is subject to inheritance tax when it includes non-domiciled assets located in the United Kingdom (UK). The change in legislation means that it no longer matters whether the UK property is held directly or via an offshore entity. The UK Government collected a record £6.1 billion (US $8.6 billion) in inheritance taxes last year thanks to this change in legislation.

For non-domiciled individuals, there is no longer anything attractive or beneficial to holding UK residential property through an offshore company. In addition to the significant IHT liability, other issues need to be considered.

Consider reviewing your current structures and succession planning now, to ensure you do not expose yourself to potential offenses, unnecessary costs, and significant tax exposure.