Improving transparency in land ownership in Scotland: a consultation on controlling interests in land

Chapter 2: Defining "controlling interest" and who is a person with a controlling interest in a land owner or tenant

1. The definition of "controlling interest" in a land owner or tenant will be one of the key provisions set out in the regulations. Getting the definition right will help to ensure that the objective of increasing transparency in relation to the individuals who are taking decisions in matters relating to land in Scotland can be achieved. The regulations will set out what constitutes a controlling interest in a land owner or tenant, or which persons are to be treated as person with a controlling interest, or both. The scope of the regulations will be another key consideration in defining "controlling interest" or who is a person with a controlling interest in a land owner or tenant, please see Chapter 3 "Scope". The Scottish Government was clear throughout the Parliamentary passage of the Land Reform (Scotland) Bill that the meaning of the term "controlling interest" in the proposed regulations would not be constrained by how the term may have been used previously or the definition of similar concepts in other legislation. It is crucial that the definition of "controlling interest" enables the purpose underlying these regulations to be achieved.

2. From the various representations that have been made so far about the issues relating to transparency of land ownership in Scotland, the Scottish Government considers that there are two main questions that underlie the notion of "controlling interest" in land owners and tenants. These are:

i. Who is in control of the decision-making in relation to the land in question; and

ii. Who benefits financially from, and takes financial risks, in relation to the land in question.

3. In some instances it may be the same person who both has decision-making power and benefits financially from, and takes financial risks in relation to, the land in question. However, depending on the legal entity or form used, and the terms of any relevant underlying legislation or contractual agreement, these parties could be different.

4. For example, in a situation in which land is owned by a trust, control of the decision-making in relation to the land may be exercised by the trustee(s) in accordance with a trust agreement rather than the individuals who ultimately stand to benefit financially from the land. However, in some instances, the beneficiaries in a trust may be considered to have exercised an element of control over land under the terms of a trust agreement.

5. It is also possible that in some cases there may be more than one interest in a single area of land, and the persons with those interests could have different decision-making powers in relation to the land. In a life rent or fee arrangement, for example, a person may be entitled to occupy a house for the duration of his or her life, but will not be the legal owner. The legal owner themselves will not be able to occupy the house. The person with the life rent may be able to make decisions in relation to the house, for example decisions relating to maintenance, but only the legal owner can make the decision to re-mortgage the house. It may be the case that a person benefits financially from a decision made by a land owner or tenant but has no control over it, for instance if a person's parents sell the parent's house and give the person the proceeds from the sale.

6. As we have set out in chapter 1 the primary purpose of the regulations is improving transparency in relation to the individuals who are taking decisions in matters relating to land. This in turn will help to ensure that land in Scotland is sustainably owned, used and developed in the interests of land owners, communities and wider society. In that chapter, we also state that the purpose of the regulations must be a devolved one, and acknowledge that matters relating to money laundering and reserved taxes are reserved to the UK Parliament.

7. In light of this, it might be that the first of the two questions at paragraph 2 of this chapter is of more relevance to defining a controlling interest for these regulations in the Scottish context.

8. However, to help define a controlling interest for our purposes, it is helpful to consider existing definitions in relation to the people with significant control ( PSC) framework for UK companies and beneficial ownership as defined in the Money Laundering Regulations 2007, irrespective of the purpose of the legislation in which the definition is contained ^[11] .

9. Later in this chapter, we will also refer to the various legal entities and forms that may hold land in Scotland and consider who may have decision-making control and who may benefit financially from the land in question.

Existing definitions relating to control of companies and beneficial owners

10. There are existing definitions in relation to PSCs in UK companies and definitions used in money laundering legislation for persons that have a beneficial interest in legal entities.

People with significant control in UK companies

11. The Scottish Government and United Kingdom Governments share a common desire to increase the transparency of land ownership and have agreed to work together in this complex area as we develop the policy for these regulations and as the United Kingdom Government take forward its proposals to enhance the transparency of beneficial ownership information of foreign companies who own or want to buy property in the UK, or bid for government contracts.

12. The principal purpose behind the information that is disclosed under the PSC framework is to improve transparency surrounding the ownership of companies and Limited Liability Partnerships. The purpose behind the regulations to be made under section 39 of the Land Reform (Scotland) must relate to matters that are within the devolved competence of Scottish Ministers.

13. As a result of this consultation, and given that the Scottish and UK Governments share the same overall aim of increasing transparency in this area, it may be that the information the Scottish Government would want to see disclosed under these regulations is the same, or similar, as that which is currently disclosed in respect of PSCs. In any event, given that companies incorporated in the UK are already under requirements to disclose PSCs, it would be undesirable to require "double reporting" of information by companies that own land in Scotland to both Companies House and to the register that is to be created under these regulations. Therefore, as we develop our proposals, we will want to ensure that the approach taken by the Scottish Government in the regulations to be made under section 39 of the Land Reform (Scotland) Act 2016 complements that taken by the UK Government in respect of UK companies, and any further requirements that the UK Parliament may legislate for in respect of foreign companies. We will also need to ensure that our work takes account of any further development of the UK PSC regime in the light of the 4 ^th EU Money Laundering Directive's provisions in this area.

14. Part 1 of Schedule 1A of the Companies Act 2006 sets out conditions as to who constitutes a PSC within UK companies, Limited Liability Partnerships ( LLPs) and Societates Europaeae ( SE) ^[12] . In summary, at least one of the following conditions must be met by an individual ("X") in relation to a company ("company Y") for the individual to be a person with "significant control" over the company:

I. X holds, directly or indirectly, more than 25% of the shares in company Y.

II. X holds, directly or indirectly, more than 25% of the voting rights in company Y.

III. X holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of company Y.

IV. X has the right to exercise, or actually exercises, significant influence or control over company Y.

V. In respect of trusts and partnerships etc., that

(a) the trustees of a trust or the members of a firm that, under the law by which it is governed, is not a legal person meet any of the other specified conditions (in their capacity as such) in relation to company Y, or would do so if they were individuals; and

(b) X has the right to exercise, or actually exercises, significant influence or control over the activities of that trust or firm.

Money laundering and beneficial owner

15. The UK Money Laundering Regulations 2007 set out a number of requirements that "relevant persons" must adhere to. A "relevant person" is a body such as a financial institution that has to meet the criteria in the regulations. Regulation 6 sets out the meaning of "beneficial owner" as follows:-

1) In the case of a body corporate, "beneficial owner" means any individual who-

a) as respects a body other than a company whose securities are listed on a regulated market, ultimately owns or controls (whether through direct or indirect ownership or control, including through bearer share holdings) more than 25% of the shares or voting rights in the body; or

b) as respects a body corporate, otherwise exercises control over the management of the body.

(2) In the case of a partnership (other than a limited liability partnership), "beneficial owner" means any individual who-

a) ultimately is entitled to or controls (whether the entitlement or control is direct or indirect) more than a 25% share of the capital or profits of the partnership or more than 25% of the voting rights in the partnership; or

b) otherwise exercises control over the management of the partnership.

3) In the case of a trust, "beneficial owner" means-

(a) any individual who is entitled to a specified interest in at least 25% of the capital of the trust property;

(b) as respects any trust other than one which is set up or operates entirely for the benefit of individuals falling within sub-paragraph (a), the class of persons in whose main interest the trust is set up or operates;

(c) any individual who has control over the trust.

16. There is some commonality between the definitions of peoplewith significant control of UK companies and beneficial owner in money laundering regulations. For instance both refer to 25% of shareholdings and both refer to control, with the PSC provisions also referring to "influence". It is worth noting that the purpose of Part 21A of the Companies Act 2006 is to increase the transparency of ownership and control of companies and the purpose of the UK Money Laundering Regulations 2007 is to tackle money laundering and terrorist financing, and as such both relate to reserved matters. It is also worth noting that in addition to these definitions that are set out in legislation there is also guidance relating to the PSC requirements ^[13] , and the money laundering regulations ^[14] .

17. The Scottish Government considers that they are helpful precedents and invites views as to how useful these definitions are for achieving the purposes we have set out. As noted above, our intention will be to ensure our approach complements that taken by the UK Government in these areas and we are keen to avoid any "double reporting" of similar information by companies.

The legal entities and trusts which hold title to land and buildings in Scotland

18. It is possible that land in Scotland could be owned by a number of different legal entities and other ownership structures, such as trusts. Annex C provides some detail about the legal entities and other ownership structures that can hold title to land and buildings in Scotland. While extensive, it is not an exhaustive list and it is important to also note aspects of public sector land ownership, charity and third sector land ownership and other ownership vehicles such as investment funds too. It is also possible that land in Scotland could be held by a legal entity incorporated in accordance with the legal system in another jurisdiction, and it is the intention that the regulations taken forward will apply to these too.

Companies

19. It is often the case that land is held by companies or other forms of body corporate. There are different types of company that can be constituted in the UK. All types have their own legal personality and can hold title to land in the name of the company. If a company owns land in Scotland the information that will typically appear on the face of the Land Register (or the search sheet if the property is still in the Register of Sasines) is the name of the company, the registered address of the company, the country of origin and possibly the registered company number. For UK companies, it is possible to use the company number to find more detail about the company on the Companies Register. ^[15]

Partnerships and trusts

20. Where land is owned in trust, or by a partnership, it is usually the case that the legal title will be held by the name of a firm or by natural persons in their capacity as trustee. From this, it is not necessarily apparent from the legal title who the person or persons with a controlling interest in the land owner or tenants are. Typically, the arrangements that govern a partnership or trust are in private agreements that may be available publicly.

Public sector bodies

21. It will also be important to consider the situation relating to land owned by all types of government bodies and local authorities. In Scotland, public sector land is held by Scottish Ministers, UK Government Ministers, local authorities and local health boards. Land and buildings may also be held by Non-Departmental Public Bodies, such as Scottish Natural Heritage. Land and buildings in Scotland may also be owned by foreign governments.

22. Companies or other legal entities are sometimes set up by local authorities and other public bodies. This arrangement includes what are known as " arms' length external organisations" ( ALEOs) and it is possible that other such mechanisms may exist. While it is unlikely that there are individuals with any form of "controlling interest" (in the terms set out in chapter 2) in government bodies and local authorities, the Scottish Government intends to address this question specifically with public bodies and local authorities during the consultation phase to develop our understanding of how titles to land and buildings are held.

Charities

23. Charities may hold land and buildings in Scotland to allow them to fulfil their charitable purposes and for investment purposes. Often, charities hold title to land as either a company or in the form of a trust. The Charities and Trustee Investment (Scotland) Act 2005 ("the 2005 Act") created a new legal form for registered Scottish Charities, the Scottish Charitable Incorporated Organisation ( SCIO). A SCIO is a form of corporate body which can enter into the same types of transaction as a natural person, such as entering into contracts, employing staff, incurring debts, owning property and suing and being sued. A SCIO is incorporated by application to the Office of the Scottish Charity Regulator ( OSCR).

24. The application to incorporate a SCIO must be made by two or more natural persons who will become the first members of the SCIO if the application is successful. The SCIO must always have at least two members, who may also be charity trustees but do not need to be. SCIOs are required to have at least three charity trustees who have general control of the administration of the SCIO and for the SCIO to keep a register of charity trustees. ^[16] A person is entitled to request that a SCIO provides them with a copy of its register of charity trustees and if the request is reasonable they are entitled to be given a copy within 28 days. ^[17] If that person is not a charity trustee of a SCIO, the SCIO may redact the name and address of any of its charity trustees if and only if it is satisfied that including that information is likely to jeopardise the safety or security of any person or premises.

25. Members of SCIO have statutory duties under the 2005 Act which mean that both the SCIO and OSCR must be clear about who the members are at all times. The members also have duties to fulfil under the 2005 Act. A SCIO must maintain an up to date register of its members so that they are clearly identifiable and therefore their decision-making powers can be seen to have been properly exercised. The register must include the name and address of the members and, if the member is a corporate body, the name of the principal contact. This register is open to members and trustees of the charity but is not publicly available.

Investment funds

26. The Scottish Government considers that Scotland is an attractive location for investment and land in Scotland can be acquired and held by investment funds. It is imperative that there is transparency in relation to the persons with controlling interests in investment funds that holds title to land in Scotland.

27. There are a variety of ways in which investment funds may structure themselves. The most common structures used are Open Ended Investment Companies ( OEICs), Authorised Unit Trusts ( AUTs) and Authorised Contractual Schemes ( ACSs). It is likely to be the case that where such bodies own land and buildings, they will do so in the name of the investment fund.

28. Currently, within a form of investment fund, it may be the case that a fund manager, who is charged with the management of the fund, could be a PSC under the conditions set out the in Companies Act 2006. ^[18]

29. We invite views from the investment fund industry as to who they consider would be the person with a controlling interest in decision-making in relation to land and buildings in Scotland held by investment funds, irrespective of where the investment fund is based.

Other legal entities

30. There are other forms of legal entities and ownership that we have not mentioned here and we invite comments on any that are not mentioned in this part of the consultation. We also invite comments from sectors that own land in Scotland, and any particular considerations that there may be in respect of their landholdings.

QUESTION 2: In your view, taking in to consideration the contents of this chapter and the associated annex C, what are the key considerations that Scottish Ministers should take in to account in defining a "controlling interest" or "persons with controlling interests in land owners and tenants" for the purposes of these regulations?