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Mark McLaughlin highlights HMRC's approach to establishing the beneficial ownership of property for Capital Gains Tax purposes.

Introduction

It ought to be straightforward enough to identify who has made a disposal for Capital Gains Tax (CGT) purposes. Of courses, tax is seldom black and white. The tax legislation offers little help. It simply states: “Tax shall be charged… in respect of capital gains, that is to say chargeable gains… accruing to a person on the disposal of assets” (TCGA 1992 s 1(1)).

Some tax advisers will no doubt be familiar with clients who have “taken their name off the deed” of property they own (e.g., transferring their legal interest to a spouse), in the hope or expectation that their CGT liability on a subsequent disposal of the property will disappear. However, the legal owner of an asset is not necessarily the beneficial owner. It is beneficial ownership (not legal ownership) which a CGT liability principally follows. But how is beneficial ownership determined for tax purposes? The First-Tier Tribunal recently considered this issue in Lawson v Revenue and Customs [2011] UKFTT 346 (TC).

Legal and Beneficial Owner

In that case, the taxpayer’s return on the disposal of a residential property was prepared on the basis that her husband was entitled to a half share of the capital gain arising. Following an enquiry into the return, HMRC concluded that the taxpayer was the sole legal and beneficial owner of the property, and that the whole gain was assessable on her. The taxpayer appealed, on the basis that her husband was also a beneficial owner of the property.

An independent review of HMRC's decision was subsequently upheld. On the face of it, it is perhaps not surprising that HMRC's decision was upheld, as the reasons given by the review included the following:

• Rental income received from the property was paid into the taxpayer's bank account;
• The full amount of income and expenditure in respect of the property letting was included in the taxpayer's return; and
• The proceeds from the sale of the property were paid into the taxpayer's bank account.

The property had been bought using a combination of a family inheritance and savings, primarily as a residence for the taxpayer's daughter who was attending college. The mortgage on the family home was in the name of the taxpayer's husband, so the mortgage on the other property was taken out in the taxpayer's sole name. However, she paid the mortgage on the family home, and her husband paid towards the mortgage on the other property.

The tribunal accepted that, at face value, the taxpayer was the legal and beneficial owner of the property. However, it was clear to the tribunal that the true purpose of purchasing the property was to provide stable and secure accommodation for the taxpayer’s daughter, as opposed to being held for investment purposes. The level of net rental income was a strong indication as to the lack of commerciality (the daughter contributed to bills as and when she could afford to). The tribunal had no doubt that the taxpayer and her husband shared all assets between them and held an equal and beneficial interest in all properties owned. This was on the basis of their relationship, irrespective of who held the legal title. The tribunal was entirely satisfied on the evidence that the taxpayer and her husband were beneficial owners of the property, and allowed the taxpayer’s appeal.

Beneficial Ownership Factors

HMRC listed a number of factors in the above case, which are taken into account by HMRC in assessing whether a beneficial interest is held by a third party. The tribunal in the Lawson case considered these factors in reaching its decision in the taxpayer’s favour. These factors (which are also listed in the Capital Gains Manual at CG70230) are:

1. Legal title;
2. Occupation of the property;
3. Receipt of any rental income;
4. Provision of funds to purchase; and
5. Receipt of sale proceeds on disposal.

HMRC’s guidance states that no single factor is determinative, and that each case must be considered in the light of its own particular facts. Nevertheless, applying the same factors as HMRC may be helpful in cases where beneficial ownership is in doubt.

Spouses and Civil Partners

In the case of a married couple (or civil partnership), a further factor may be added to those listed above, namely whether a Form 17 has been submitted to HMRC. Form 17 is broadly a declaration where the beneficial ownership of an asset is divided other than equally between the couple, and the split of beneficial ownership of both the asset and income from it is identical. Form 17 states what the split is. HMRC states (at CG22020): “If such a declaration has been made you should treat it as evidence of the existence of an express agreement concerning the ownership of the asset and you should follow that split in assessing the gains on the disposal of that asset.” Of course, the Form 17 declaration is not compulsory, so the absence of a declaration is not evidence in itself that beneficial ownership is equal.

HMRC will generally assume (in the absence of Form 17) that if one spouse (or civil partner) paid for an asset and is the sole legal owner, that they are also the beneficial owner, unless there is evidence to the contrary (CG22023). The same applies if all the disposal proceeds are retained by one of them. However, HMRC also acknowledge that a presumption about beneficial ownership may be rebutted. For example, one spouse may have acquired the property as a gift to the other. In addition, HMRC recognises that a spouse without a legal interest may have an equitable interest, by reference to the extent of their contribution to providing the family home. This principle has also been considered by the Courts in the context of divorce proceedings or claims by unmarried former co-habitees.       

In the absence of factual evidence to determine beneficial ownership, on the disposal of an asset HMRC will seek to tax the spouse (or civil partner) with legal title, or if they have joint legal title, on a 50:50 ownership basis. Keeping good records and evidence will therefore be important, particularly in cases where beneficial ownership is unclear.