What is legal versus beneficial ownership?

Do you know the difference between legal and beneficial ownership? Picture: Getty Images

Do you know the difference between legal and beneficial ownership? Picture: Getty Images - Credit: Getty Images/iStockphoto

The key difference between legal and beneficial ownership of property, or indeed any asset, is both age-old and highly topical, says Jon Hook from Norwich Accountancy Services.

In the context of real property (land and buildings), legal ownership usually refers to the person whose name is registered as the owner at the Land Registry. Most of the time the legal owner is the same as the beneficial owner but not always.

Take the case of Mr and Mrs Jones who own 27 Eucalyptus Drive: here the house and its accompanying garden will be registered in their names and will also belong to them beneficially.

Let's take an example of an alternative situation. An office building at XX Strand London, WC2 is owned by Superior Investments Limited, a company registered in Panama. The company is in turn administered by shadowy company agents with a 'brass plate' address in St Peter Port, Guernsey. If you like, this is the opposite extreme of the situation of Mr and Mrs Jones and it is likely that, if you were able to get a copy of the accounts of the Panama company that it would show no assets at all on the balance sheet. How is this possible?

The answer is that the property at XX Strand is owned by the Panama company as a nominee or bare trustee for someone else - for example a Russian billionaire. In essence the situation is the same as you would find in a portfolio of quoted shares through your local bank. The share portfolio is registered, on the plc's share register as being owned by Barclays Bank Nominees Limited (or something similar). But Barclays Bank Nominees Limited are not the true owner of the shares - it's you!

So you receive dividends on the shares, which are paid to you directly rather than being paid to the nominee company, and you have the absolute right at any time to order the nominee company to sell the shares or transfer them to someone else.

Some confusion exists regarding bare trusts and discretionary trusts: in a bare trust the bare trustee has no discretion whatsoever, and this is crucially important for tax purposes.

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The tax rules recognise very clearly the existence of bare trusts and indeed the Capital Gains Tax (CGT) rules define what a bare trust is included in this definition the phrase that another person is 'absolutely entitled to direct how [the asset] shall be dealt with. Furthermore, the CGT rules explicitly state that any transactions in the asset are effectively treated as being made by the beneficial owner rather than the bare trustee.

One important reason for setting up a bare trust arrangement is that true ownership is invisible. This invisibility is no doubt now compromised under regulations that require the disclosure of the true beneficial owner in certain circumstances; however these tend to apply to ownership of shares rather than property.

So if for some reason you don't want someone else to know you own a property, a bare trust could be the answer. But, as always, it is best to seek legal advice from a suitably qualified lawyer.

This column is sponsored by Norwich Accountancy Services.