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.
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.