Mark McLaughlin looks at the distinction between assets which are legally or beneficially owned, and the implications for capital gains tax purposes.
In most cases, assets are legally and beneficially owned by the same person (NB this article considers the law in England, Wales, and Northern Ireland). However, this is not always the case.
Why does it matter?
The distinction between legal and beneficial ownership can be important for tax purposes. For example, the capital gains tax (CGT) regime is generally concerned with property to which a person is ‘beneficially entitled’, as opposed to legal ownership.
For example, if two individuals (A and B) are joint legal owners of a property, it does not automatically follow that A and B will both be liable to CGT on a chargeable gain from a subsequent disposal of the property, unless they are also joint beneficial owners.
Spot the beneficial ownership
HM Revenue and Customs (HMRC) considers that there is no single factor determining beneficial ownership. Each case will depend on its own particular facts. However, HMRC’s Capital Gains Manual (at CG70230) lists the following as indicators that a person is a beneficial owner of the land:
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holding legal title;
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occupying the land;
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receiving rental income from the land;
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providing the funds to purchase the land; or
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receipt of sale proceeds from disposal of the land.
A further factor was identified in Wilmore v Revenue and Customs [2023] UKFTT 858 (TC). In that case, a couple (C and the appellant W) married in 2012. They purchased a property (R) in May 2009 with a deposit. The title of R was in W’s sole name because her salary allowed the mortgage to be obtained. In mid-2015, the couple bought another property (T) jointly for £541,100 (by means of a cash deposit of £100,000 from re-mortgaging R, and a mortgage secured on T and raised on W’s salary). The couple separated in September 2015. C moved into T, and W continued to live in R. On 9 September 2016, T was sold for £905,000, and the joint mortgage for T was redeemed. Land Registry records confirmed the transferors of T on 9 September 2016 were C and W. In November 2020, HMRC assessed W to CGT on the disposal of T. W appealed, contending that her beneficial interest in T was transferred to C before 5 April 2016. As the transfer was on a ‘no gain, no loss’ basis under the rules for inter-spouse transfers (TCGA 1992, s 58), which continue to apply during the tax year of separation, the disposal took place in 2015/16.
The First-tier Tribunal (FTT) considered that a ‘constructive trust’ arose in 2015/16. By agreement between the separated couple in December 2015, W transferred all her beneficial interest in T to Mr C and became a trustee holding the legal title of T jointly with Mr C until the eventual sale of T in September 2016. As the transfer of W’s beneficial interest in T took place in 2015/16, the CGT inter-spouse rules applied to treat the transfer as taking place on a ‘no gain, no loss’ basis.
Practical tip
In the absence of an express agreement or trust deed, the legal presumption is generally that beneficial ownership of property follows its legal ownership. Hence, it is important to maintain clear proof of beneficial ownership if it differs from legal ownership.
