Mark McLaughlin looks at the distinction between legal and beneficial ownership of property for tax purposes.
Putting someone ‘on the property deeds’ is a popular phrase among taxpayers. It broadly involves changing the legal ownership of a residential or investment property (NB this article relates to a property in England and Wales, but not Scotland).
Legal vs beneficial ownership
It may be necessary to consider not only legal ownership of the property but also beneficial ownership, as the owners will not necessarily be identical.
Putting someone on the property deeds broadly involves changing the registered ownership of the property (e.g., transferring it into a family member’s sole name or adding the spouse as a joint owner) with the land registry.
The legal process is not addressed here; guidance on transferring the ownership of property is available on the Gov.uk website.
Tax and beneficial ownership
HM Revenue and Customs (HMRC) considers there is no single factor determining beneficial ownership. For capital gains tax purposes, HMRC (in its Capital Gains manual, at CG70230) lists the following as indicators that a person is a beneficial owner of land:
- holding legal title;
- occupying the land;
- receiving rental income from the land;
- providing the funds to purchase the land; or
-
receipt of sale proceeds from disposal of the land.
Inheritance tax (IHT) is also generally concerned with property to which a person is beneficially entitled. In disputes over beneficial ownership (e.g., if the property deeds do not also establish the beneficial interest), HMRC will seek evidence such as the following (see HMRC’s Inheritance Tax manual at IHTM15044):
- other documents from when the ownership commenced;
- later documents which evidence earlier intentions;
- statements from the owners;
- statements from others; and
-
evidence from the conduct of the joint owners when ownership commenced.
What could possibly go wrong?!
Even if HMRC is satisfied that putting someone else on the property deeds has transferred legal and beneficial ownership, it is not necessarily the end of the story. For example, for IHT purposes, the ‘gifts with reservation’ anti-avoidance rules can render the gift of an interest in property ineffective in certain circumstances.
There is also a potential income tax trap. The ‘settlements’ anti-avoidance provisions may bite in some situations, including if the gift of a property interest between spouses (or civil partners) was not an ‘outright’ one. For inter-spouse gifts (and generally), there must be no circumstances in which the gifted asset (or any related property) is, or may become, payable to the donor. ‘Related property’ includes income from the gifted property interest.
For stamp duty land tax (SDLT) purposes (in England and Northern Ireland), there is normally no liability on a gift of property between individuals. However, if the property is transferred subject to an existing mortgage, the assumption of the mortgage by the donee generally constitutes chargeable consideration (NB similar rules apply in Wales and Scotland).
The above is only a selection of potential tax issues where someone is ‘put on the deeds’ of a property; specific tax (and legal) advice should be sought as appropriate.
Practical tip
In the absence of factual evidence to determine beneficial ownership between married couples (or civil partners), on disposal of a property HMRC will generally seek to tax the spouse with legal title (or if they have joint legal title, on a 50:50 ownership basis). Keep good records and evidence.
