Overseas Investors

Overseas Entities Register

Some two years after this was first announced by the then prime minister, David Cameron, the Registration of Overseas Entities Bill was finally published in July and the consultation on the draft legislation closed in September. From 2021, there will be a new register of the beneficial owners of overseas entities that own or wish to buy or let UK property. Such overseas entities will be required to be registered with the details of their “registrable beneficial owners”, determined on the same basis as under the Persons of Significant Control regime introduced in 2016. Overseas entities will be unable to register the purchase, sale, charge or grant of certain leases of UK property at the Land Registry unless and until they appear on the new register. The potentially serious implications of failure to comply with the new requirements (including criminal liability and the inability to register title to UK property) will mean that additional due diligence checks and warranties will be needed to ensure that an overseas entity has an up-to-date registration number and that the one-year update period has not expired (or will not be expiring before completion of the transaction).

So, what can overseas entities do now to prepare for the new regime? Those overseas investors who either already own UK property or wish to buy/lease UK property should review their corporate structures to identify who their “registrable beneficial owners” are and continue to monitor these proposals to ensure prompt registration when necessary. While the new rules have yet to be finalised and various uncertainties remain not least as to exactly which entities will be exempt, how to raise awareness of the rules coming into force (to avoid criminal liability simply by doing nothing) and how JPUTs and foreign government pension and superannuation funds will be affected. One thing is certain: the new rules will add another layer of complexity to real estate transactions involving overseas investors.

Additional tax burdens on non-resident investors

In addition to the new overseas entities register, a number of tax changes have either been announced over the past 18 months or are in the pipeline, which will also affect overseas investors. Examples include capital gains tax on disposals by non-resident investors in UK property, corporation tax (rather than income tax) on non-UK resident companies that carry on a UK property business and, most recently, a proposed additional 1% SDLT surcharge on foreign buyers of UK residential property. We discuss these in the Tax Update below.

Overseas Investors not deterred…?

So… what has been the impact of these additional regulatory and tax changes so far? Is it really just “business as usual”…? If initial signs are anything to go by, the appetite of overseas investors to investing in UK real estate has certainly not been dented: 2018 saw record levels of overseas investment into London with Asian investors accounting for the largest share with £3.6bn in bought property, and South Korean investment in particular showing a significant increase on its 2017 levels. In addition, there are expectations for a new wave of Japanese investment into the UK, although no-one expects this to happen instantaneously. The picture is not quite so rosy for outbound investment from mainland China, which has fallen markedly over the past year but this is due more to the introduction by the Chinese Government in 2017 of tighter controls on foreign property acquisitions than as a result of these proposed changes.

Whilst there are clearly challenges ahead in terms of overseas investors getting up to speed with the new regulations, and making sure that registrations are completed and kept up to date, the changes being introduced by the Overseas Entities Register are unlikely to act as a significant deterrent to investment in UK real estate. More important are the increased tax burdens facing overseas investors but, as we said at the start, the UK is to a large extent merely playing catch up with other jurisdictions where similar rules are already in place.

As for Brexit, Asian investors as a whole remain significant investors into the UK notwithstanding the current uncertainty. Although recently there has been some shift in the sources of capital and a dip in overall UK investment volumes in the third quarter of the year, the perceived advantages of investing into the UK (and particularly London), including favourable exchange rates, have largely outweighed concerns related to the UK’s withdrawal from the EU.

Overall, the fundamentals for investing into the UK remain strong and far from pulling up the drawbridges, UK real estate remains open for investment from all parts of the globe.