Do you own something legally or beneficially?
A common area of confusion among property owners is the distinction between legal and beneficial ownership and the corresponding tax treatment of each.
Jon Hook, managing director of Norwich Accountancy Services, discusses.
Legal ownership is not so much about having special rights or advantages, but more about certain responsibilities.
A legal owner is essentially the 'official' or 'formal' owner of a property whereas a beneficial owner is the person with the right to enjoy or benefit from the property – this can include the right to occupy or enjoy any income from the property.
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A person can be both a legal and beneficial owner which is very common.
Legal ownership reflects who is responsible for the property and the parties registered under the Land Registry are the legal owners. (Incidentally, under English law no more than four persons can be formally registered as legal owners of a property).
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Beneficial ownership or 'equitable interest' in property reflects who is entitled to the benefits or fruit of the land, be it in monetary or another form. The law of equity has developed to ensure that fair outcomes are achieved.
In the case of a young child whose parents have passed away - the child cannot take full legal ownership of land until reaching the age of 18. If the parents have left the family home to the child, a trustee (or trustees) will be appointed to look after the property until the child reaches 18. The trustee (or trustees) will be the legal owner(s), whereas the child will be the beneficial owner with the right to enjoy the property or if rented out the right to any income received.
In terms of taxation, it is all about who has the beneficial interest in the property – so whoever has the right to income or the proceeds of a sale will be the one who is taxed.
Property can be gifted to avoid inheritance tax but if the property is still lived in by the donor after the gift, it will be treated by HMRC as a gift with reservation of benefit and will be considered to have never left the donor's estate for IHT purposes even though the legal ownership has changed to that of the donee.
Tax is generally paid by those who are entitled to the income but it can also be paid by those who receive the income - trustees sometimes have to file a tax return and pay tax on the money they receive on trust assets, even though it will, ultimately, be paid out to the beneficiaries of the trust. The trustees effectively pay tax 'upfront' for the beneficiaries, who then get a credit against their own tax bills for this tax already paid.
In summary, it is usual for the liability to taxation to follow the beneficial owner – the challenge for taxpayers is keeping good paperwork in case the 'fiscal fiend' comes knocking which is never pleasant at the best of times, not least if you are ill prepared!
Jon Hook can be contacted at Norwich Accountancy Services, sponsors of this column, on 01603 630882 www.norwichaccountancyservices.co.uk