What Is
Ownership?
In most cases, the issue of whether or not someone ‘owns’ a
thing is a straightforward matter. But, real property (land and/or buildings,
etc.) is one of those areas where the precise form of ownership can be
important.
As we are interested primarily in the taxation of ownership
rather than in a precise legal definition, the following explanation should
suffice:
Legal ownership – whose name is listed on the Land
Registry and on the deeds.
Beneficial interest (ownership) – who is entitled to
benefit from the property, in terms of use, occupation, or the income arising
from its being let out, etc. Also referred to as an ‘equitable interest’.
Even with real property, it is very common for legal
ownership and the beneficial interest to be held by the same person(s). But it
can be split, and often is, for good reason. For example, minors cannot hold
full legal title to real property in the UK. If a person dies leaving (say) his
home to his young children, then the children cannot give good receipt for that
property until they reach 18. They can have a beneficial interest in the property,
but cannot yet hold legal title. Nevertheless, somebody must legally own the
property in the interim – effectively a name on the Land Registry, title deeds,
etc.
The normal solution is for trustees to be appointed, who
will legally own the property but entirely for the benefit of the children. If
the property is let out, the net rental income ‘belongs’ to the children and –
usually when the youngest child reaches 18 – the trustees will transfer the
property to the children’s full legal ownership, as originally envisaged in the
Will.
A broadly similar approach is often taken when the family
home is maintained for young children following divorce and, generally
speaking, trustees will commonly hold the legal title to property – but for
others’ beneficial interest – in a variety of trust arrangements.
Beneficial/Legal Ownership: Which Kind Matters For Tax Purposes?
Simply put, from a direct tax perspective, it is normally
the beneficial owner who is taxable. For reference, the following HMRC Manual
sections confirm that beneficial ownership is the key:
•
Income tax – Property Income manual
(PIM1020/PIM1030); Trusts and Estates manual (TSEM9160 or TSEM9305)
•
Capital Gains Tax – Capital Gains manual
(CG10720)
•
Inheritance Tax – Inheritance Tax manual
(IHTM04441 – but note the distinction for Scottish law)
•
Stamp Duty Land Tax – the definition of a
‘chargeable interest’ for the purposes of SDLT is wide-ranging and a ‘major
interest’ in England and Northern Ireland means any freehold or leasehold
estate, whether
legal or equitable (see SDLTM04130). However, HMRC also
accepts that a ‘purely legal interest’ may have negligible market value on which
a charge to SDLT might be assessed – see in the context of the additional 3%
charge, HMRC’s position at SDLTM09785 (‘Cases of no beneficial ownership’ –
where a solely legal interest is insufficient to exceed the minimum value of
£40,000 at which SDLT become chargeable at Condition C)
So, to summarise, when the legal and beneficial owners are
one and the same, that owner is taxable, but when the legal and beneficial
owners are split, tax generally follows beneficial ownership; however, SDLT can
potentially apply to a transfer of either form of ownership, depending on the
circumstances.
This is an excerpt from our popular tax report Taxation of Property Partnerships and Joint Ownership.
