The distinction between legal and beneficial ownership of land and property (in English law) is important. When a dwelling is (say) transferred from one individual to another, the names shown on the conveyance will be the legal owners.
Beneficial Ownership
However, they will not necessarily be the beneficial owners. It is beneficial ownership that is normally relevant for capital gains tax (and inheritance tax) purposes. Identifying the beneficial owner of a property can be difficult, as there are several potential factors. HMRC’s Capital Gains Manual (at CG70230) points out that indicators of beneficial ownership include occupation of the property, the receipt of rent for the property, the payment of funds to buy the property and the receipt of proceeds from selling it.
Constructive Trust
If the legal owner holds a beneficial interest in a property on behalf of someone else, a ‘constructive trust’ sometimes arises. The parties may have an understanding (or a common intention) about beneficial ownership that differs from the legal ownership. HMRC guidance (in its Trusts, Settlements and Estates Manual at TSEM9710) lists three questions to be addressed in considering whether a common intention constructive trust exists:
- Was there an agreement or common intention that the parties should share beneficial ownership of the property?
- If so, did the party claiming act to their detriment (i.e., disadvantage) in reliance on that agreement or common intention or change their position?
- If so, what is the size of the beneficial interest to which the claimant is entitled?
Establishing whether a constructive trust exists can be difficult but is by no means impossible.
Bought in Someone Else’s Name
For example, in Raveendran v Revenue and Customs [2024] UKFTT 273 (TC), the appellant (R) owned the leasehold of a property in London. His brother (X) used the property to trade from. X wanted to buy the freehold but could not obtain a loan. The property was therefore bought in R’s name for £300,000. Around nine years later, the property was sold to R’s sister-in-law (X’s wife) for £350,000. HM Revenue and Customs (HMRC) obtained a property valuation of £1,080,000. HMRC assessed R to capital gains tax. R argued he was not the beneficial owner of the property. X had paid the mortgage, with amounts coming from X to R and then onto the bank. R had not contributed funds to the purchase, other than by way of a loan. When asked why £350,000 was paid to him for a property he acquired for £300,000, R replied he thought the extra was to compensate for stamp duty. The First-tier Tribunal (FTT) found that all the purchase price of the property was funded by X, either from direct contribution or from servicing the mortgage that was taken out in the appellant’s name. X was very clear that the entire mechanism of the purchase had been arranged by his brother and described the transaction as “my brother using my name”. There was a clear understanding by both parties that the property was held for X. The FTT also found that X had paid for property improvements. The FTT concluded that X was the sole beneficial owner of the property.
Practical Tip
Case law might be of some assistance to support a constructive trust claim. However, circumstances differ. Expert professional advice is recommended.