How grandparents are facing more restrictions than oligarchs

Bizarrely, current UK legal requirements imply it is the latter.

In March 2022 the Economic Crime (Transparency and Enforcement) Act was rushed through Parliament in response to renewed parliamentary and public concern, in the wake of Russia’s invasion of Ukraine, about ‘dirty money’ – that is, the proceeds of corruption and other crime – being stored and laundered in the UK by wealthy foreigners.

A key measure in the act is a register of overseas companies and other entities owning or buying UK property. This is designed, ministers explained, to require anonymous foreign owners of UK property to reveal their real identity to ensure criminals cannot hold houses in secretive chains of shell companies.

Except it will not – or not necessarily.

The legislation directs that most non-UK companies owning UK land must go on a public register maintained by Companies House, which already holds a public database showing UK companies. 

This registration includes identification of the ‘beneficial owner’ of the company (the real owner or owners of the company).

This is sensible and could potentially be of great benefit to UK and overseas law enforcement on an ongoing basis as well as to officials putting in place and enforcing sanctions in the current emergency. However it has gaping holes. 

During the passage of the act, the Chartered Institute of Taxation highlighted a particular loophole in the new law; namely that the legislation requires the identification only of the beneficial owners of the company in question, and not those of the land or property itself.

This matters because the company could be holding that land as a nominee for an individual who does not own the company. The company might be owned by a Cayman or Panamanian law firm for example, which holds legal ownership of many properties on behalf of wealthy clients.

In this scenario the names on the register would likely be the partners in the law firm, or perhaps no one at all. The name of the oligarch would be nowhere to be found.

The Government acknowledges this. When the amendment we proposed was debated in the House of Lords, the minister, Lord Martin Callanan, replied that the register was designed specifically to capture the beneficial owners of overseas entities, and while there might be a wider policy debate to be had about capturing ultimate economic beneficiaries of land, this register "would not be the appropriate vehicle" for that.

Even if the oligarch does own shares in the offshore company holding the UK property, if they hold 25 per cent or less of that company’s shares nothing needs to be disclosed. Other family members may each hold shares. Provided each is individually at or below the 25 per cent threshold no one needs to be named.

In addition, the registration requirement does not come into effect until six months after the register comes into force – plenty of time for wealthy foreigners to divest themselves of their UK assets if they are publicity shy or fear having them seized.

There are other gaps in the legislation where a foreign company owns the UK house which is wholly owned by a foreign trust.

A recent case in the UK sanctions regime illustrates how leaving legislative loopholes can provide an opening for wealthy property owners to escape measures meant to catch them.

An early target of UK sanctions over the invasion of Ukraine was Alisher Usmanov, a businessman once described as one of Vladimir Putin’s favourite oligarchs. The UK Government announced in March that it was imposing (among other things) a full asset freeze on Usmanov, cutting him off from “significant UK interests including mansions worth tens of millions”.

However a spokesman for Usmanov responded that he was no longer the legal owner of most of those properties as they had been transferred into irrevocable trusts of which the beneficiaries were members of Usmanov’s family, but not Usmanov himself, the implication of this being that this would put them outside the sanctions regime.

While having a fast, strong response to a major crisis like the invasion of Ukraine is important, if the legislation is not carefully considered and painstakingly constructed it risks being ineffective. This is especially necessary with legislation, such as the Register of Overseas Entities, that is being put in place for the long term.

Legislation needs proper thought of all the potential consequences and absurdities. Timely consultation with those with expertise in these areas and knowledge of current practice makes it likelier that these shortcomings are exposed before being enacted. Rushed legislation is invariably bad legislation.

But while the disclosure requirements for this register are too loose, another suffers from the opposite problem. This is where the grandparents come in.

The Government also operates a Trust Register. This was created in 2017 as an anti-money-laundering measure in response to an EU directive and extended in 2020 with effect from September 2022.

It now places a requirement on all UK trusts or nominee arrangements whether or not they have a UK tax liability to register and provide information on their trustees, beneficiaries and assets to HM Revenue and Customs.

It might usefully be thought of as a ‘companion volume’ to the Companies Register, albeit one where access is limited to HMRC, the police and other parts of UK officialdom (though we understand that public interest journalists might be able to gain access in some circumstances).

In practical terms this means that when parents or grandparents hold assets such as premium bonds, stocks and shares for their minor children or grandchildren, they may have to register this at the Trust Register, according to current HMRC guidance.

There are more than 860,000 premium bond holders under the age of 16. HMRC have just announced that Junior Isas and child trust funds do not need to register, which is welcome, but all other types of assets held on behalf of minors outside a bank or building society are still subject to registration however small.

The registration process is onerous and requires the ‘lead trustee’ to create a government gateway account for each trust they want to register, before they attempt the registration itself.

The lead trustee must then supply their name, date of birth, national insurance number, address, telephone number, country of residence and country of nationality. Further personal details about the settlor who created the trust, the beneficiaries and the nature and value of the assets within it must also be supplied.

It is likely to take a well-prepared trustee who has all the necessary information to hand a good two hours to achieve this. If the trustee employs an agent to effect the registration on their behalf, the process is further complicated by the need for a ‘digital handshake’ to hand over authority, increasing the time (and professional cost) required.

It is worth noting at this point that if the trust is not UK resident there is no requirement to register unless it acquires land directly (not through a company) from October 6 2020 or has a UK tax liability on assets owned directly.

So the common structure for foreigners of buying a UK property owned by a foreign company which is then owned by a trust will still not need to register on the Trust Register even if the land is acquired now.

So, to recap, we have a situation where the wealthy foreigner can in a number of ways avoid having to register the ownership of their country estates and Kensington townhouses, while hundreds of thousands of parents and grandparents who hold shares or a premium bond account for their children and grandchildren are expected to go through an onerous process to register on a government database.

It begs the question: How will HMRC be able to find the needle of dirty money in the haystack of all these new registrations showing small value assets on behalf of minors? The other possibility is, of course, large scale non-compliance, largely through ignorance, but is that really something to encourage?

There is a chink of light. In the view of some experts in this area there are good arguments to say that the small bare trusts holding premium bonds and other types of regulated product could fall within an exemption from the Trust Register for legislative trusts. This seems to be the view HMRC have taken on Junior Isas where they have now relented.  

We have asked HMRC to clarify this. If they decide it is not within this exemption the Government could in any case widen the existing exemptions, given that post-Brexit it no longer needs to follow EU directives to the letter.

Meanwhile, part nine of the newly published levelling up and regeneration bill will give the Government a new power to require the Land Registry to collect information on those who own or have rights over land in England and Wales.

This sounds very positive, but it will not be clear until the regulations have been published whether this will actually close off the loopholes the register of overseas entities has left.

We would like to see the regulations published in draft so that any deficiencies can be ironed out before parliament has to make a yes or no decision on them.

We need a system of registration for companies, trusts and other entities that is proportionate and based around the risk posed by the entities in question.

It needs to capture those who are trying to hide or launder dirty money, while not imposing disproportionate burdens on the compliant person with modest means and straightforward affairs who simply wants to provide for their children or grandchildren.

The Government needs to think again about whether it has got the balance right.

Blog by John Cullinane , director of public policy at the Chartered Institute of Taxation 

This article first appeared in FT Adviser on 20 June 2022