Guidance HMRC

The beneficial owner of a property is the individual who ultimately benefits from its ownership, distinct from the legal owner whose name is on the property deed. This concept reflects ownership for one’s own benefit rather than holding property as a trustee for someone else. It’s often described as having a “beneficial interest” in the property.

The legal owner of a property is typically presumed to also be the beneficial owner unless evidence suggests otherwise. This presumption was emphasized in the case of Stack v Dowden [2007], where Baroness Hale of Richmond highlighted that the burden of proof rests on the party asserting a difference between legal and beneficial ownership.
Separating legal and beneficial ownership can occur through:

1. Clear indication by name: When property is held explicitly by one person as trustee for another (e.g., “A as trustee for B”), the legal owner (A) holds the property for the benefit of the beneficial owner (B). Similarly, when property is held in the name of one person as a nominee for another, the legal owner (the nominee) holds the property for the beneficial owner.
2. Declaration of trust: Legal and beneficial ownership can also be separated through a formal declaration of trust. For example:

• If property is held in the name of B but it’s declared that B holds it on behalf of A, A becomes the beneficial owner and B the legal owner (as a nominee or bare trustee).
• If A decides to transfer beneficial ownership of property to B while retaining legal ownership, a valid declaration can establish B as the beneficial owner and A as the legal owner.

In both cases, the declaration of trust clarifies the separation of legal and beneficial interests in the property.

The general principle is that whoever holds beneficial ownership of a property also holds beneficial ownership of the income generated from that property, proportionate to their share of ownership. For instance, if A has a beneficial interest in 75% of a property and B in 25%, A would typically be entitled to 75% of the income, and B to 25%.
However, this direct correlation between property and income can be altered through a valid declaration or deed of trust. For example:

1. Interest in possession trust: In this type of trust, the trustees legally own the trust property but are not entitled to the income from it; instead, the beneficiary is entitled to the income. This arrangement is established through a valid deed, where the settlor specifically assigns the income from the property to the beneficiary. In such cases, the presumption that income follows property does not apply because the income rights have been separated from the property rights.
2. Transfer of income rights: If someone, like A, wishes to transfer the right to income to another party, like B, while retaining legal and beneficial ownership of the property, they can do so through a valid deed. Once the deed is executed, B becomes entitled to the income even though A still owns the property. However, if the transfer is not made on arm’s length terms, meaning it’s not a fair and genuine transaction, the Settlements legislation may apply, affecting the tax implications.

In both cases, the presumption that income follows property is rebutted by the separation of income rights through a valid legal instrument, such as a declaration or deed of trust.

Legal ownership refers to the individuals in whose name a property is held or registered. This ownership can be singular or joint. When property is held jointly, there are two main ways it can be held beneficially in England and Wales: as joint tenants or as tenants in common.

1. Joint Tenants: In a joint tenancy, each party is entitled to the entire property jointly. If one joint tenant dies, their ownership automatically passes to the surviving joint tenant(s) due to the survivorship rule. Joint tenancy is common among married couples or civil partners because of this feature. However, for inheritance tax planning purposes, couples may choose to sever the joint tenancy into tenancy in common, usually later in life. This change allows each partner to specify their share of the property in their will. Joint tenancy is less common among unrelated individuals or groups larger than two.
2. Tenants in Common: In a tenancy in common, each owner holds a specific share in the property, which may or may not be equal. For example, one owner may hold 50% while the other holds 50%, or one may hold 75% while the other holds 25%. In this arrangement, each owner’s share forms part of their estate upon death and does not automatically pass to the surviving owner(s). Instead, it passes according to the deceased owner’s will or the rules of intestacy. Tenancy in common is typical for individuals who are not in a personal relationship, and it allows for more flexibility in specifying ownership shares.

The presumption of joint tenancy can be overridden by evidence indicating a tenancy in common, such as a declaration of trust specifying unequal shares, a Land Registry Form A restriction indicating a tenancy in common, or evidence of severance of the joint tenancy through various means. If such evidence exists, the ownership is considered tenants in common rather than joint tenants.

For income tax purposes, taxation of income is based on beneficial ownership rather than legal ownership. Understanding who is the beneficial owner, or who is “entitled to” the income, is crucial.

• Receiving or Entitled to: Tax legislation specifies who is liable for tax on various types of income. For example, for rental income, interest, dividends, and other distributions, the person liable for income tax is either the person receiving or entitled to the income. While the receiving basis allows taxation of the person in receipt of the income, the ultimate aim is to tax the person who is entitled to it. For instance, in an interest in possession trust, the trustees initially pay tax on the trust income as they receive it, but the beneficiary is ultimately taxable on the income as they are entitled to it. Thus, the beneficiary is taxed on the income based on their entitlement, with credit given for any tax paid by the trustees.
• Exceptions:
  • Settlements Legislation: This legislation taxes the settlor on the income of a settlement if they retain an interest in it, regardless of whether they receive the income or are entitled to it.
  • Jointly Held Property – Married Couples and Civil Partners: Married couples or civil partners holding property jointly are treated as beneficially entitled to the income in equal shares, unless they request otherwise under certain circumstances.
• Joint Ownership:
  • Joint Tenants: In a joint tenancy, where property is held jointly, each joint tenant is entitled to the whole property and the entire income. For income tax purposes, the income is equally divided among the joint owners.
  • Tenants in Common: In a tenancy in common, where each owner has a specific share in the property, the income tax position aligns with their ownership shares.
  • Each owner is taxable on the proportion of income corresponding to their ownership share. For example, if one owner is entitled to 25% of the property, they are taxable on 25% of the income, while another owner entitled to 75% of the property is taxable on 75% of the income.

Below is an extract of specific guidance given to HMRC staff:
You may get claims that, while property is held in A’s name, it is owned by B, or that B is entitled to all the income. A common feature of such claims is that B is taxable on income at a lower rate than A, and/or has personal allowances to use. Some claims will be acceptable, others will not.
The taxpayer you are enquiring into would be A, who has potentially understated income. In some cases, B may have already paid tax on the income. In such a case, if A is ultimately taxable on the income, B may make an overpayment relief claim subject to the normal rules.
The arguments put forward about income tax may differ from those put forward about ownership of property for non-tax purposes. For non-tax purposes, often the claimant asserts that the property belongs to them, whereas for income tax purposes the (higher rate) taxpayer is likely to claim that the property (or income) does not belong to them. The cases that this guidance is concerned with involve two or more parties together alleging that a certain beneficial ownership of property or income exists. The parties are in agreement, but HMRC may disagree.
You will need to establish whether the alleged transfer of beneficial ownership of property or income ever took place, but note that the onus is on the taxpayer/s to prove that the beneficial ownership is different from the legal ownership.
Some examples are also provided to illustrate the potential claims:
Examples of income tax claims include:

• Property is held in A’s name. A says s/he has transferred beneficial ownership of the property to B, who should be taxed on all the income.
• Property is held in A’s name. A says the property is beneficially owned by A and B, and so the tax due on the income should be split between them.
• Property is held in A’s name. A says s/he is the legal owner of the property but claims that B provided part of the cost, so B should be taxed on part of the income.
• Property is held in A’s name. A says s/he still owns the property but has transferred the right to all of the income to B, so B should be taxed on it.
• Property is held in the name of A and B. A claims that the property is beneficially owned by B only, so B should be taxed on the income.
• Property is held in the name of A and B. A claims that B provided part of the cost, so B should be taxed on part of the income.
• Property is held in the name of A and B. A claims that the income belongs 10% to A and 90% to B, so B should be taxed on 90% of the income.

There may be other variations – examples of various claims and explanations of the correct treatment are given in the examples section below.

An express trust is typically established through a declaration of trust made by the legal owner, which can be either written or oral, except in the case of land where it must be in writing as per the Law of Property Act 1925.

• Written Declaration: This trust declaration must exhibit three certainties:
  1. Certainty of words (intention to create a trust)
  2. Certainty of subject (identifying the property and the beneficial interest/s in it)
  3. Certainty of object (identifying the person/s having the beneficial interest/s).

A simple declaration is adequate to evidence the existence of a bare trust. For example:

• “I, John Smith, declare that I hold the property described as XXXXX for my son, David Smith absolutely.”
• “I, John Smith, declare that I hold the property described as XXXXX on trust for my son, David Smith.”

As long as no conditions are attached, such declarations are effective immediately upon being signed. If conditions are present, it ceases to be a bare trust.
A declaration of trust usually does not require formalities like registration with the Land Registry, delivery, or witness signatures. It becomes enforceable from the date of execution, but evidence is needed to prove its existence prior to execution.

• Deed: While not legally mandated, complex trusts are usually established by deed. In a trust deed, the legal owner appoints trustees and outlines the trust’s terms. The legal title in the property may also be transferred to the trustees.

A deed must be signed by the parties involved and witnessed. It is effective only upon delivery to the trustees, as they need to administer the trust based on its terms and exercise control over the property.

Property held jointly by married couples or civil partners is subject to special taxation rules regarding income arising from such property. Here are the key points:

• Property: This includes various assets like land, buildings, savings accounts, shares, and intellectual property.
• Joint Ownership: The rules apply specifically to property held jointly by married couples or civil partners. If property is held in the name of only one spouse or civil partner, these special rules do not apply. Similarly, if the property is held in the name of a nominee, the rules do not apply.
• Living Together: The term “living together” means being married or in a civil partnership and not separated under certain conditions specified in the Income Tax Acts.
• Rules:
  A. The 50/50 Rule (ITA/S836): Income from jointly held property is treated as split equally between the spouses or civil partners for income tax purposes. This applies even if the property is owned in unequal shares. However, this rule can be overridden by a valid declaration on form 17 (ITA/S837).
  B. The Form 17 Rule (ITA/S837): If the true income split is different from 50/50, the couple can opt to be taxed on that basis for income tax purposes by submitting a declaration on form 17.
• Exclusions from the 50/50 Rule:
  • Income to which neither spouse or civil partner is beneficially entitled.
  • Partnership income.
  • Income from the commercial letting of furnished holiday accommodation.
  • Income from jointly held shares in a close company.
  • Income for which a declaration under section 837 has effect, indicating unequal beneficial interests.

Married couples and civil partners have the option to request taxation based on their actual entitlement to income from jointly held property. Here’s what you need to know:

• Declaration Process: Couples make a joint declaration of unequal beneficial interests using form 17, which overrides the standard 50/50 rule. This declaration must be made jointly; if one partner declines, the standard 50/50 split applies.
• Eligibility: This declaration applies only to property subject to the 50/50 rule. Separated couples cannot make this declaration, as the rule applies only to couples living together.
• Optional: Couples are not obliged to opt for a different split. They can choose the standard 50/50 split even if one partner owns the majority of the capital and income.
• Beneficial Interests: The declaration must accurately reflect each spouse’s beneficial interest in the property and the income arising from it.
• Reality Check: Couples cannot arbitrarily choose their tax split. The split must reflect the actual ownership shares in the property and its income.
• Evidence: HMRC may request evidence of beneficial ownership along with the declaration.
• Making the Declaration: The declaration must be submitted on form 17, signed and dated by both partners. It sets out the property and income covered and each partner’s interest in them.
• Duration: The declaration remains in force until there’s a change in the couple’s interests or they stop living together.
• No Limit on Declarations: Couples can make multiple declarations for new or existing joint holdings.
• Effective Date: The declaration takes effect from the date signed by the last partner, provided it reaches HMRC within 60 days. Late declarations are invalid.
• Strict Time Limit: HMRC strictly enforces the 60-day time limit. There’s no extension power.
• Ceasing the Declaration: The declaration ends upon death, permanent separation, divorce, or dissolution. Any change in beneficial interests also terminates the declaration.
• HMRC Action: HMRC stamps the form upon receipt and conducts preliminary checks for completeness and accuracy.
• Lost Declarations: If a declaration is lost in the post, couples must provide another copy, and HMRC considers it valid if posted in time.

Overall, couples have the flexibility to choose their tax split based on their actual beneficial interests in jointly held property.

Legal ownership of land and buildings is governed by Section 52 of the Law of Property Act 1925, requiring any conveyance of land to be made by deed. This deed must be registered with the Land Registry since 2002, providing evidence of legal ownership. Disputes over ownership can often be resolved by examining Land Registry records.
Regarding express trusts involving land, Section 53(1)(b) of the same Act stipulates that a declaration of trust must be evidenced in writing, signed by the settlor. While the declaration itself could be oral, there must be written evidence signed by the settlor confirming the trust’s existence and its beneficial interests.
In joint ownership scenarios, there’s a legal presumption of joint tenancy, but this can be rebutted with evidence indicating otherwise. Land Registry form TR1 allows joint owners to declare their ownership type, whether as joint tenants or tenants in common.
For taxation purposes, profits from UK and foreign land and buildings are treated as arising from a business under ITTOIA/S268. Tax liability falls on the person receiving or entitled to the profits under ITTOIA/S271. Rental income can derive from the land or building itself or from a lease.Regarding express trusts involving land, Section 53(1)(b) of the same Act stipulates that a declaration of trust must be evidenced in writing, signed by the settlor. While the declaration itself could be oral, there must be written evidence signed by the settlor confirming the trust’s existence and its beneficial interests.
In joint ownership scenarios, there’s a legal presumption of joint tenancy, but this can be rebutted with evidence indicating otherwise. Land Registry form TR1 allows joint owners to declare their ownership type, whether as joint tenants or tenants in common.
For taxation purposes, profits from UK and foreign land and buildings are treated as arising from a business under ITTOIA/S268. Tax liability falls on the person receiving or entitled to the profits under ITTOIA/S271. Rental income can derive from the land or building itself or from a lease.

These examples illustrate various scenarios related to property ownership, joint ownership, and taxation:

1. Legal Owner Not as Claimed: A asserts joint ownership of a property, but Land Registry records show sole ownership by A. Since there’s no evidence of joint ownership, A is taxed on all income.
2. Valid Declaration of Trust: A valid declaration of trust transfers beneficial ownership of a property to another party, affecting tax liability accordingly.
3. Settlements Legislation: Even if a trust deed transfers income rights, if the settlor retains an interest in the property itself, the income remains taxable on the settlor.
4. Sole Name: Contributions by A and B – Resulting Trust: Contributions to property purchase establish a resulting trust, affecting the tax liability of each party based on their beneficial interests.
5. Sole Name: Contributions by A and B but Loan by B – No Resulting Trust: If one party’s contribution is a loan, not a direct investment, the legal owner remains the sole beneficial owner for tax purposes.
6. Sole Name – No Resulting Trust: Absent direct contributions to the property purchase, paying bills or redecorating doesn’t establish a resulting trust.
7. Sole Name – Taxpayer Claims Constructive Trust: Absent evidence of an agreement to share ownership, the legal owner is taxed on the income, regardless of how the parties divide it.
8. Sole Name – Settlements Legislation: Even if income rights are transferred, if the settlor retains an interest in the property, the income remains taxable on the settlor.
9. Joint Names of Husband and Wife – 50/50 Rule Applies: Jointly owned property by a married couple living together is subject to the 50/50 rule for income tax purposes unless a valid declaration states otherwise.

These examples underscore the importance of legal documentation, beneficial interest, and the specifics of property ownership in determining tax liability.