Just because many other classic cars have been reshelled in the past doesn't make it good or legal. It's illegal, and shouldn't be on the road.
There is nothing to say the 318i shell isn't from a stolen car (no history of where that shell came from, just that it was a 318i), and if anyone in authority (wof inspector, certifier, police etc) can prove the tags don't match the shell, it's 100% game over, you would probably have to reshell it again, properly.
It's no different to my M328i, which was a full M3 conversion into a 328i shell. I couldn't just plate and tag it (like this e30), it had to remain registered as a 328i and be certified for the modifications.