Beneficial ownership, receiving a share of the proceeds and reducing CGT
When looking at the capital gains tax position on the disposal of property, the beneficial interest can have a significant impact.
CGT follows primarily the beneficial, as opposed to the legal interest. So the title holder is not necessarily the one subject to CGT on the disposal. Good examples of this are bare trustees and nominees.
So if you have a case where A, is the legal owner but holds the property as a nominee or bare trustee for B, on a disposal of the property it is B that is subject to CGT. Similarly there is no CGT charge on any transfer of the legal interest from A to B.
This, or at least variations on this, are very common. There are many instances where a property is held legally by one individual but actually occupied by another. In this case unless you can show that the occupier of the property actually held the beneficial interest, any capital gain on disposal would arise to the legal owner and would be subject to CGT.
By contrast if the occupier was subject to CGT they may well qualify for a CGT exemption under the principal private residence ('PPR') relief rules.
So determining the beneficial interest can be very important for CGT purposes. It has been held in various cases that if a spouse contributes directly or indirectly towards the initial cost, or towards mortgage instalments, he/she acquires, in equity, an interest in the matrimonial home proportional to those contributions even though the other spouse alone is registered as the legal owner.
In other cases the beneficial interest will depend on who has the 'rights and responsibilities of ownership'. This will include the responsibility for bills, ability to occupy it, ability to determine when it is sold, benefiting from the proceeds of sale etc.
If you wanted to argue that property was held as a nominee or bare trustee it is usually advisable to back all this up with a nominee agreement specifically stating who holds the beneficial interest in the property.
Proceeds of sale
One point that is worth noting is that just receiving a share of the proceeds of sale would not in itself mean that a share of the beneficial interest was held. It could be argued that this was just an allocation of the proceeds and providing the recipient had no other interest or rights over the property no beneficial entitlement could arise.
This could be useful if you have a situation where A wishes to purchase a property for B. The property will be occupied by B and A still wants to benefit from the future proceeds of sale.
By carefully structuring the agreement between A and B to show that A has no beneficial entitlement but can receive a share of the proceeds the gain would arise fully on B and as such would be exempt from CGT as his main residence.
Jack bought a house in January 2001 for £50,000 and occupied it with his wife until January 2002, when they separated. He bought a new house for himself whilst she remained in the matrimonial home. They divorced in May 2004.
In August 2008 the Court ordered that Jill should be given 1/3 of the proceeds of sale of the matrimonial home. In January 2009 the house was sold for £180,000.
The gain accruing to Jack is computed as follows:
Disposal proceeds 180,000
Less Cost - 50,000
Net gain 130,000
Jacks Private residence relief
Period of ownership:
January 2001 - January 2009 = 8 years
Period of only or main residence:
January 2001 - January 2002 = 1 year + last 3 years = 4 years PPR relief = 4/8 * £130,000 = £65,000
The chargeable gain is £65,000 before the annual exemption.
Jack is not entitled to a deduction for the £60,000 paid to Jill because this sum is an allocation of the proceeds and not a deduction in arriving at the gain.
Jill is not charged to Capital Gains Tax on the £60,000 she has received. It represents financial provision for her ordered by the Court and is not a sum received in consideration for the disposal of an asset.
So receiving the proceeds of sale is separate and distinct from the beneficial/equitable ownership and could be used in appropriate cases to minimise CGT on the disposal of assets.
The key issue is to ensure that the initial purchase is structured correctly with the beneficial ownership held by the individual subject to the lowest taxes eg the occupier for PPR relief purposes or an individual who will become non UK resident (eg to obtain the CGT exemption).
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