In this edition we take a look at proposals to regulate pre-pack sales; proposals to improve energy efficiency in the private rented sector; an extension to the scope of the UK Trust Register; and money laundering regulation for letting agents.
A clamp down on pre pack sales?
There is no legal definition of a “pre-pack sale” but it is generally understood to be an arrangement for the sale of all, or a substantial part, of a company’s business being put in place prior to the company entering formal insolvency (administration), after which the appointed administrator completes the sale.
There are well-publicised concerns about the transparency of pre-pack sales – in particular those to connected parties such as the existing management or owners, where creditors are often unaware of the sale until the transaction has completed – and whether they represent best value for creditors. These concerns have been heightened by the likelihood (and actuality) of more companies becoming insolvent as a result of the COVID-19 pandemic.
On October 8, 2020, the Insolvency Service published a report on pre-pack sales. The report sets out the findings of a review to assess the impact of voluntary industry measures introduced in 2015 to improve their transparency. It concludes that the voluntary measures have not been particularly effective and recommends regulation.
Draft regulations have already been published. They do not propose a complete ban on pre-pack sales to connected parties but that conditions should be placed on them. The proposed regulatory framework includes that:
- An administrator will be unable to dispose of the property of a company to a person connected with the company within the first eight weeks of the administration without either the approval of creditors or an independent written opinion meeting certain eligibility requirements;
- The administrator must have no reason to believe that the opinion provider is not independent of the connected party or does not meet specified eligibility requirements;
- The opinion provider must provide a written report stating either that the case is made for the disposal or that it is not;
- Where a report states that the case is not made, an administrator can still proceed with the disposal but will be required to provide a statement setting out the reasons for doing so; and
- Administrators will be required to send a copy of the opinion provider’s report to creditors of the company and to Companies House.
The government also intends to take steps to strengthen professional regulatory standards, in particular to improve the quality of the information provided to creditors.
The regulations will be brought forward “as soon as Parliamentary time allows”, but this will have to be well before June 2021 when the statutory power to make them expires.
A director of The British Property Federation has stated that the proposals are a “huge step in the right direction” and that company voluntary arrangements should be made subject to similar scrutiny.
UK Trust Register: Scope extended
Regulations which will amend the rules regarding the UK Trusts Register were made on September 14, 2020. Guidance from HMRC is expected either later this year or early 2021.
The UK Trust Register has been in existence since 2017 and all trusts which have UK tax liabilities are currently liable to register. At present the register can only be viewed by governmental authorities.
Pursuant to the UK’s implementation of the EU’s Fifth Money Laundering Directive, a number of changes to the UK Trust Register are required, including the following:
- All UK trusts will need to register, regardless of whether they have UK tax liabilities;
- Trusts that are already registered will have to provide further information in relation to their beneficial owners;
- Third parties will now be able to access the register;
- Non-UK trusts will need to register if they acquire UK real estate, but if the trust has no UK resident trustees the information on the register will not be publicly available.
UK pension funds and certain charitable trusts are excluded from the scope of the regulations.
It had been hoped that bare trusts, or nominee arrangements, would be excluded from the requirement to register, but this is not the case. However it has been confirmed that trusts relating to joint ownership are not required to be registered, as long as the legal and beneficial owners are the same people. This will exclude most joint ownership of land and other assets.
Importantly, the new rules only apply to non-UK trusts which acquire UK real estate on or after the date on which the new rules come into force; existing trusts that hold UK land do not need to register unless further acquisitions of UK land are made or the trust has UK tax liabilities.
For further information please contact Tax Counsel Julia Lloyd.
Raising the energy efficiency bar in the residential PRS
Since April 2018 and with some exceptions and exemptions, landlords of private rented sector (PRS) properties have not been allowed to grant a new tenancy, or renew an existing tenancy, unless their property has an Energy Performance Certificate (EPC) rating of at least E.
Since April 1, 2020 this has also applied to all residential PRS properties regardless of whether there has been a change of tenant. Landlords of F- and G-rated homes are now required to invest in improving the energy performance of those properties to an EPC rating of at least E, up to a spending cap of £3,500 per property.
On September 30, 2020 a government consultation was published seeking views on proposals to set a higher bar. The preferred option comprises four elements:
- Raising the minimum EPC rating to C;
- A phased trajectory for achieving this, requiring new tenancies to achieve a C rating from 2025 and all tenancies from 2028;
- Increasing the cap on required landlord investment to £10,000 per property;
- Introducing a ‘fabric first’ approach (improving the fabric efficiency of a building before heat and electricity generation) to energy performance improvements.
Proposals are also made to encourage greater compliance and awareness among landlords, including:
- A new property compliance and exemptions database;
- A requirement that letting agents and online property platforms may only advertise and let properties that are compliant with PRS regulations;
- An increase in the civil penalty fine for non-compliance, with a suggested maximum fine of £30,000 per property.
The consultation closes on December 30, 2020 and comes just over a year after a consultation seeking views on how best to improve the energy performance of non-domestic PRS buildings, the government’s preference being a minimum B EPC rating by April 1, 2030.
The costs of installing energy efficiency measures typically fall on the landlord, but it is usually the occupying tenant who benefits from the resulting lower bills. Will higher rents for more energy efficient buildings be the consequence and will landlords move away from an increasingly burdensome PRS market?
Footnote: The government also published an Action Plan in September 2020 setting out proposals to improve the effectiveness of EPCs in improving the energy performance of existing building stock, given that domestic and non-domestic buildings together are estimated to account for around 30 per cent of the UK’s total greenhouse gas emissions.
Money laundering regulations and letting agents
A reminder that the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 came into force on January 10, 2020 bringing certain categories of letting agents within the scope of money laundering regulations (MLRs) for the first time, joining those engaged in estate agency work, who were already in scope.
The letting agents concerned are those acting for landlords or tenants in “high value transactions”. A “high value transaction” is a letting at a monthly rent equivalent to €10,000 or more per transaction.
What do the MLRs require? In broad brush terms the requirements include: carrying out risk assessments; establishing policies and procedures to mitigate and manage those risks, in particular customer due diligence checks (which have also been extended by the new Regulations); appointing a Money Laundering Reporting Officer; and the provision of anti-money laundering training for staff.
Letting agents are also required to register with HMRC, the supervisory authority, by January 10, 2021. HMRC has published guidance: Money laundering supervision for estate agency or letting agency businesses, which was updated in September 2020 to include information for letting agency businesses on how to register.
Further guidance entitled Money laundering: Understanding risks and taking action for estate agency and letting agency businesses was also published on October 14, 2020. This is effectively a risk assessment which identifies the key areas and risk indicators that letting agency and estate agency businesses should consider as they carry out supervised business activities.
At the time of writing we still await detailed HMRC guidance for letting agents on money laundering supervision such as that produced for estate agency businesses, but in the meantime the latter may prove helpful.