Nail down beneficial ownership with a deed of trust
4th December 2023
Posted in Articles by Forbes Dawson
In these times of high house prices and relatively low wages it is not unusual for parents to help out their children on their first house purchase. Often this will involve the parents taking out a mortgage ‘on behalf’ of their children with an intention that the child will repay them when they are able to get a mortgage themselves. The problem here is that the legal transfer of the property creates red flags to HMRC and can result in lengthy correspondence to try to resolve the position. They will take a default position that a transfer of legal title will also indicate a transfer of beneficial title and therefore seek tax on a disposal that will not necessarily have taken place.
Example
Steve gives his son John £50,000 towards his first house and also takes out a £150,000 mortgage on John’s behalf so that a £200,000 house can be purchased for his son to live in. Steve will be shown as the legal owner of the house on the land registry, but the intention is for John to have beneficial ownership. A few years later the house is worth £300,000 and so John takes out a mortgage of £150,000 to repay Steve’s mortgage and the title duly moves to John on the land registry. HMRC’s default position here will be to seek tax from Steve in respect of a £100,000 capital gain. However, arguably Steve has never had a beneficial stake in the property and has simply been holding it on trust for John until John could obtain a mortgage.
To avoid any ambiguity here Steve and John would have been well advised to enter into a deed of trust at the outset of this arrangement. Such a document could have unambiguously demonstrated that the intention was always for John to have beneficial ownership of the property.
How to deal with HMRC enquiries
HMRC will generally want to see some kind of documentation to demonstrate that beneficial ownership is different to legal ownership – such as a deed of trust. However, in their guidance they state:
Establishing the true owner or owners of the beneficial interest in land can be a difficult matter. There is no single factor which determines beneficial ownership. Each case must be considered in the light of its own particular facts….
This means that in practice the position can be argued out. The taxpayer will need to demonstrate that the fact pattern surrounding the purported beneficial owner is consistent with that position. For example, rental payments would not fit with that fact pattern although defraying the parent’s mortgage expenses would do.
These issues were considered In the case of Lawson v Revenue and Customs (2011). The taxpayer successfully argued that her husband was also a beneficial owner of a property, even though he did not have legal title.
Everything will depend on the facts of each case but often it will be possible to justify that the beneficial owner is different from the legal owner. This should be particularly true when a son or daughter of the legal owner lives in the property as their main residence.
Forbes Dawson view
Tax treatment generally follows the beneficial rather than legal ownership of an asset. Although in 90% of cases legal and beneficial ownership will be the same, there will be a significant number of cases where these types of ownership will be different. The golden rule should be to clearly set out the position in a deed of trust so as to avoid ambiguity and potentially lengthy correspondence on the point with HMRC. Although Mrs Lawson won her case she probably experienced a lot of hassle before she was able to claim victory.
