The British Government has recently published a discussion paper inviting comments by 1 April on proposals to require the disclosure of ultimate beneficial owners of foreign companies buying, or even those already holding, UK real estate on a specific register.
Why is the Government proposing this?
According to the Evening Standard’s front page article on 21 October 2015, at least £100 billion of properties in London alone have been acquired by overseas investors “by shadowy corporate structures usually registered in tax havens to hide the buyers’ identities…and in some cases has been linked with money laundering and tax evasion”.
The Government is of course right to crack down on tax evasion and money laundering. However, it is unfortunate that much of the media reporting has failed to distinguish between the legitimate and lawful use of tax-efficient offshore structures by reputable property investors on the one hand and the criminal conduct of a few on the other.
Who would be affected?
Those who directly or indirectly hold over 25% of the shares or voting rights in a company or can appoint a majority of the board or can otherwise exercise significant influence or control are likely to be caught. This process will be familiar to those dealing with professional advisers such as law firms and accountancy firms who are required to carry out their own Client Due Diligence/Know Your Customer checks on their clients.
It is not clear whether this would apply to all UK registrable property, which would seem disproportionate, for example rack rent leases of immaterial value. In any case, no distinction is made between residential and commercial property.
Will the information be made publicly available?
It is clearly not necessary to publish this information to attack money laundering and tax evasion and the Government may exempt EU companies from public disclosure but it may require public disclosure of non-EU companies.
Publishing the information may not be welcomed by many investors who wish, for entirely legitimate reasons, to keep their investments confidential from the wider public (as opposed to HMRC). Ironically, the EU is introducing a new Data Protection Regulation with tougher sanctions for unfair disclosure of personal data at the same time as the UK is requiring greater public disclosure of lawful commercial transactions.
What about enforcement and penalties?
The proposals would assign every foreign company which provided the required information a unique registered number and it would be become impossible to register any transfer of the property without this number. Penalties for providing false information may include criminal sanctions such as a daily fine and a suspension of their identification number to prevent the company from transferring or mortgaging the property.
The way ahead
The next stage will be a formal consultation paper. The proposals are not yet complete or certain. However, it is likely that legislation will ultimately follow, particularly if the country votes to remain in the EU on 23 June. Read the government’s discussion paper on Beneficial Ownership Transparency here.
Adam Bogdanor is a Partner at Berwin Leighton Paisner