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Landlord Insider
On the Landlord Insider blog, you’ll find some excellent resources for landlords of all sizes. From the latest landlord news, to professional advice, tips and guides for landlords, there’s something for everyone. Brought to you by the excellent team behind the Landlord Vision property management software.

Legal v Beneficial Ownership: A ‘Taxing’ Distinction!

What is Legal Ownership?

Legal ownership reflects who is responsible for the land/property. The parties registered under the Land Registry are the legal owners. Under English law, no more than four persons can be formally registered as the legal owners of a parcel of land/property. Those (up to) four persons are essentially equal. 

What is Beneficial Ownership?

To have beneficial ownership or an ‘equitable interest’ in the property refers to those who are entitled to the benefits or fruit of the land, be it in monetary or other form. The law of equity aims to ensure that fair outcomes are achieved. 

Is the Legal Owner also the Beneficial Owner?

While the beneficial owner may often also be the legal owner, (and vice versa), this will not always be the case: 

Example #1: Co-owners

Bill and Ted put up the funds to buy a holiday home in York. For whatever reason, only Bill’s name is noted in the Land Registry. Bill is the legal owner, but Ted is not too bothered by this because he knows that the law of equity will recognise that he is a co-owner and that both Ted and Bill have a beneficial interest in that property. In this case Ted will still have the right to use/occupy the property (without paying for it) and the right to enjoy any income, etc. derived from the property. 

Example #2: A Limited Company

A limited company has shareholders or in other words owners. These shareholders are broadly equivalent to the beneficial owners of land. If the company is sold or liquidated, the shareholders get the proceeds.

However, where legal issues arise within a limited company, it is primarily the directors’ responsibility to deal with it on behalf of the shareholders. The company directors are broadly equivalent to the legal owners of land. 

It is, of course, very common for directors also to be shareholders – which then means that there is an overlap between the legal responsibility, and the beneficial ownership.

Example #3: Trusts

In English law, a child cannot take full legal ownership of land until reaching the age of 18. If a deceased parent’s will leaves the family home to a young child, a trustee is appointed to look after the property until the child reaches 18 years old. The trustee(s) will be the legal owner(s), whereas the child is the beneficial owner and has the right to enjoy or occupy the asset; and if the property is rented out instead, the child has the right to any income received; and if the property is sold, then the proceeds ‘belong’ to the child.

Tax Implications

Tax applies to those who have a beneficial interest in the property, in terms of:

  • who has a right to the income – income tax follows who receives the income (or is entitled to any income arising)
  • who has a right to the proceeds of any property disposal or part-disposal – capital gains tax (CGT) will be charged on whoever is entitled to the proceeds as beneficial owner
  • who has a right to enjoy or occupy the property – inheritance tax (IHT) will also follow whoever enjoys the use of the asset

It is worth noting that Stamp duty land tax generally applies only where the value of the interest transferred is at least £40,000, but it can potentially apply to transfers of either beneficial or legal ownership.

Tax Complications

Income Tax 

Income tax generally applies to those who are entitled to the income from a property, however in some cases it’s the person receiving the income that is taxed. This is common in the case of trustees.

For example, trustees sometimes have to file tax returns and pay tax on the money they receive on trust assets, even though it will, ultimately, be paid out to the trust’s income beneficiaries.

There can be similar arrangements for non-resident landlords. 

Capital Gains Tax

The above example of Bill and Ted is straightforward. But what if Ted says that his investment was only a loan to Bill, so that Bill could actually buy and own the house outright? Or, what if Ted is married, and says that his wife should also be included for CGT purposes (and use her basic rate band/annual exemption) when the property is sold? 

While legal ownership is relatively easy to determine, beneficial ownership can change relatively easily (or be more difficult to pin down in the first place).

Inheritance Tax

Many readers will be familiar with the ‘gifts with reservation of benefit’ IHT trap, which says that where a person gives away (for example) the family home, but retains the right to live in it, the home may be deemed never to have left that person’s estate for IHT purposes. 

This reflects that the original owner may have transferred legal ownership to another party, but has retained an equitable interest – a right to occupy the property – for themselves.

Practical Tip

Legal ownership is more concerned with the responsibilities of land ownership, while beneficial ownership is about who benefits from or enjoys the use of the property. Quite rightly, tax usually follows the beneficial owner. But pinning down beneficial ownership can sometimes be problematic. It is worth keeping hold of notes and documentation, in case they are needed later, such as in the event of an HMRC enquiry.

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