Lee Sharpe reviews beneficial and legal ownership, and the implications for property taxation.
There are many different forms of property ownership, interest and/or occupation from a legal perspective. This article looks at the difference between legal and beneficial ownership, why it matters for tax purposes and how it might be proved.
Compare and contrast
- Legal title or legal ownership is by reference to whose name is on the legal documents and recorded at the Land Registry.
- Economic benefit, or beneficial ownership/interest describes who has the right to enjoy the property – in terms of occupation, income from letting or proceeds on sale, etc.
Frequently, the legal owners will also be the beneficial owners. But it is also common for someone to have a beneficial interest in property without a corresponding legal interest.
For example, a couple may live together and each contribute to the mortgage, but the property may have originally been acquired by only one party. Depending on the circumstances, the party who is not the legal owner may nevertheless have an equitable interest in the property.
Some quirks of legal ownership
Only four persons can be noted as the legal owners of property. There may be further legal/beneficial owners but the first four named on the deed will hold it ‘on trust’ for the others.
Minors (i.e. children under the age of 18) cannot have a legal interest in land, although they frequently have a beneficial interest.
Joint legal owners are effectively trustees (potentially for themselves if they also hold the beneficial interest) in what is called a ‘trust for land’ (‘trust for sale’) such that the benefit of any proceeds, etc., falls to those with the beneficial interest.
So who is taxed/taxable?
Generally, it is the beneficial interest that is taxable. This is logical: it is the person who benefits from income, proceeds, etc., who should be taxed – not some poor soul whose name just happens to be on the deeds!
There are special rules in relation to trusts that we shall touch on later, but let’s consider the guidance/legislation in turn.
Income tax
Rental income is assessed on whoever receives or is entitled to the profits (ITTOIA 2005, s 271). Generally this will be whoever is actually carrying on the business, but this could be different if, say, a ‘passive’ investor appoints a professional agent to manage the business on his or her behalf.
Although an agent may be responsible for managing the income, it would still ordinarily be the investor who remained entitled to receive the profits. See also HMRC’s Property Income manual at PIM1020.
However, do take care with regard to capital allowances and fixtures: generally, fixtures in a property ‘belong’ to the landlord even if installed by the tenant but entitlement to tax relief nevertheless generally falls to the tenant.
If the landlord is not resident in the UK, then the letting agent (or sometimes the tenant, if there is no agent) is often required to account for tax to HMRC in the first instance, although it is ultimately on account of the landlord’s own tax position.
Capital gains tax
Capital gains tax is charged on the person making a disposal of assets, according to TCGA 1992 s 1(1) – not exactly helpful in identifying whether it is the legal or the beneficial owner.
In fact, the legislation fails directly to deal with this, although it can be inferred from parts such as s 60, which considers nominees. One instead has to look at case law, such as Kirby (Inspector of Taxes) v Thorn EMI Plc [1987] STC 621, Lord Nicholls:
“There is no statutory definition of disposal... ...This therefore means the beneficial ownership rather than bare legal title” [determines who makes the gain]. HMRC’s Capital Gains Manual confirms at CG10720, and helpfully adds, “The transfer of legal ownership between a nominee and the beneficial owner does not constitute a disposal for the purposes of the Act.”
Inheritance tax
Very broadly, inheritance tax is charged on a person’s estate on death or on the reduction in his or her estate if something is given away during one’s lifetime. IHTA 1984 s 5 states that:
“A person’s estate is the aggregate of all of the property to which he is beneficially entitled and HMRC’s IHT Manuals explain at IHTM04031 that holding something merely in a fiduciary or representative capacity does not count.”
Value added tax
HMRC’s Manual VATLP04240 advises in relation to value added tax: “Where property is sold, let or otherwise dealt with, it will normally be the case that the beneficial owner will be seen as the person making the supply.” (See also VATA 1994 Sch 10 para 4)
Trusts
Simple or ’bare’ trusts are transparent for tax purposes: the trustees are ignored and the beneficial owners are taxed directly through their own tax returns.
With more complex trusts, where the trustees have more discretion over assets and/or income, the trustees have to account for the trust’s income, gains, etc., for tax purposes. But the beneficiaries of the trust generally accrue credit for the tax paid by the trustees; so, put simply, tax paid by the trust is just an intermediate step in taxing the beneficiaries.
Proving beneficial ownership
Beneficial ownership extends beyond tax law, and is frequently encountered in matrimonial cases. Ideally, a declaration of trust should be drawn up, which names who has what beneficial interest(s).
Without that, it is necessary to prove that there was a common intention to share beneficial ownership, either express or implied by the conduct of the parties.
The tax case Lawson v Revenue and Customs [2011] UKFTT 346 (TC) provides some help for joint property investors. Mrs Lawson was the only person named on the deeds to a property – she was the only legal owner – but she was able to demonstrate that her husband also had a beneficial interest in the property. Notably, Mr Lawson had helped to fund the deposit for the property and the ongoing mortgage payments, despite the proceeds of rent and disposal being paid to an account in Mrs Lawson’s name only.
HMRC’s guidance may be found in their Capital Gains manual at CG70230, wherein it lists a number of factors it will consider to establish who has a beneficial interest in the property:
- who holds legal title;
- who occupies the land;
- who receives any rental income from the land;
- who provided the funds used to purchase the land; and
- who received the sale proceeds from a disposal of the land.
Note that HMRC focuses on transactions, ostensibly ignoring any documentary evidence of parties’ intentions.
Your name’s not down...
Having demonstrated that it is beneficial ownership which is the key factor across a wide range of land taxes, it is important to note that, generally, beneficial ownership is assumed to follow legal title (see for instance Lord Hoffman’s comment in Stack v Dowden [2007] UKHL 17:
“The onus is then on the party who contends that the beneficial interests are divided between them otherwise than as the title shows to demonstrate this on the facts.”
Whilst it may at first seem that making a significant financial contribution to the acquisition of the property alone should be a strong indicator, HMRC may argue, in the absence of any paperwork, that the contribution was more in the nature of a loan than something intended to derive an equitable interest in the property.
The irony from a tax perspective is that it may fall to one taxpayer to assert that another has a beneficial interest so as to reduce his or her own liability.
Practical Tip :
Good evidence is vital to establishing beneficial interest distinct from legal ownership.
