James Bailey outlines a recent case which highlights the important distinction between legal and beneficial ownership for tax purposes.
A colleague of mine says that if you ever ask a farming family who owns the farm, the reply will be “We do!” Only later does it emerge that different parts are owned by different combinations of family members, and this can cause problems in relation to capital gains tax and inheritance tax.
The ownership of land is different from other forms of ownership. My wristwatch is mine, though I long ago lost the receipt from the jeweller, and if you give me a suitable sum I will sell it to you and it will be your watch. Land is more complicated.
Legal v beneficial ownership
The first thing about land is that the ‘legal’ and ‘beneficial’ ownership does not have to be the same. The legal ownership is recorded on the deeds to a property and is (or should be) registered at the Land Registry, whereas the beneficial ownership (which is what counts for tax purposes) can become separated from the legal ownership.
A recent case (Watson v Revenue and Customs [2014] UKFTT 613 (TC)) was a good example of this separation. A married couple had traded in partnership, and jointly owned some land used for the partnership business. The wife had decided she wanted to get out of the business and had agreed with her husband that he would continue as a sole trader. The business accounts (which included the land as an asset) were prepared on this basis, and when the land was sold the whole gain was declared by the husband.
At the time of the sale, both spouses signed the sale agreement ‘as beneficial owners’ which was in fact incorrect, but presumably they did not notice (or did not care). HMRC argued that the wife should be taxed on half the gain on the land because she was the legal owner of half of it, but the couple successfully argued that by agreeing to leave the business for her husband to carry on, and by accepting that the land was an asset of the business she was no longer involved with, the wife had given up her beneficial ownership, and all the gain was taxable on the husband.
An important point here is that there was written evidence (in the form of the business accounts) that the land belonged to the husband alone, even though it was still jointly owned in legal terms. Land, unlike other assets, cannot be transferred except by an ‘instrument in writing’. There are some exceptions to this rule but they are beyond the scope of this article.
Beneficial ownership and tax
The beneficial ownership of land can be important for tax purposes, as shown by the Watson case. For example, if you own a factory which is used by a partnership of which you are a member, you will only be entitled to business property relief for inheritance tax on 50% of its value, whereas if it was owned by the partnership (even if the partnership agreement gives you the lion’s share of any profit on its disposal) the rate of relief is 100%.
Entrepreneur’s relief reduces the rate of CGT on the sale of business assets to 10% from the normal 28%, and again this can be complicated in a case where the ownership of land used for the business is different from the ownership of the business itself. In some cases, it can actually be an advantage for the land to be owned outside the partnership or company, but this can get very complex and is best left to your tax adviser.
Planning Tip :
If your business involves the ownership of land, make sure that ownership is clearly defined. The Watson case shows that HMRC can be very literal-minded when it comes to who owns land!
