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Rents from property held as nominee

Rents from property held as nominee in son's name

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Hello

I have been asked to help a young man who is the sole owner (at Land Registry) of a flat,  which is rented out. There is a mortgage on the property, also in his sole name. However the deposit of about £60,000 was paid by his mother and there is a simple hand written trust deed signed by him and his mother stating that the property is belongs to her, with him as nominee.

The purchase was arranged in this way because the mother could not obtain any loan and she lives outside UK for much of the time and she has no other income.

The son is a higher rate tax payer. The HMRC have asked for accounts for the last fewyears and I reckon that this should be decalred in the mother's name as beneficial owner.

Any advice on this matter or any pitfalls I should look out for ?   Thank you

 

Replies (16)

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By Tim Vane
31st Oct 2016 19:05

So are you saying the rents are being paid to the mother, and the letting agent or tenant has been withholding tax and paying it to HMRC? Or has the mother been registered to receive the income gross? If so, HMRC must already be satisfied that the mother is the beneficial owner, so why are HMRC asking for accounts from the son?

Or is it the case that no tax has been deducted as the letting income has been attributed to the son as a resident landlord? If so, it may now be hard to convince HMRC to accept it as the mother's income.

Is the mortgage company aware of the arrangement between the son and the mother, or is there the possibility that you have mortgage fraud to report as well?

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By kaff
31st Oct 2016 20:51

Just taking what you've said at face value (with no view expressed on whether the deed is actually effective or not); it would seem that there's a possibility that the mother may be chargeable to tax on the income as the beneficial owner, but the son is liable for any mortgage payments, meaning that those costs can't be deducted from the mother's income.

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Replying to kaff:
By JCresswellTax
01st Nov 2016 09:39

kaff wrote:

Just taking what you've said at face value (with no view expressed on whether the deed is actually effective or not); it would seem that there's a possibility that the mother may be chargeable to tax on the income as the beneficial owner, but the son is liable for any mortgage payments, meaning that those costs can't be deducted from the mother's income.

All in all a piss[***] poor arrangement (from a tax point of view anyway).

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By Justin Bryant
01st Nov 2016 10:30

Can the above negative comments please be supported by some case law, legislative or HMRC manual justification? For example, why is it necessarily mortgage fraud to transfer the equity in a property (under a bare trust arrangement)without informing the lender? Why can mortgage payments not be made by someone as agent for a principal and why are they thereby not deductible as W&E for the property business etc? As far as I am aware, HMRC manuals take a pretty relaxed view on all these things (probably because beneficial ownership can be a grey area legally), but I am happy to be proved wrong if you can cite something authoritative confirming all these alleged problems.

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Portia profile image
By Portia Nina Levin
01st Nov 2016 10:43

I, surprisingly, find myself agreeing with Justin that the mortgage interest is deductible.

I agree with Tim that either the mother should have registered to receive rents gross, or they should be having tax deducted.

We cannot say whether or not anybody is guilty of mortgage fraud. There is not necessarily any reason for the lender to be aware of the trust arrangement.

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David Winch
By David Winch
01st Nov 2016 11:38

With regard to possible mortgage fraud, I think one would need to see the mortgage application (including the 'small print' in the declaration signed by the applicant) & know what other information, if any, had been supplied to the lender / mortgage broker before coming to a decided view on that. (Although I agree that the accountant may consider that he has a reportable suspicion of money laundering in such a situation.)

On a separate point, in my work in confiscation cases the prosecution will typically take the view that the legal ownership (recorded at the Land Registry) is also the beneficial ownership unless / until the defendant produces credible evidence to the contrary. So I groan inwardly whenever I see assertions of different legal v beneficial ownership.

David

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Replying to davidwinch:
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By Portia Nina Levin
01st Nov 2016 11:44

Did you groan inwardly when reading the Prest v Petrodel Resources judgement David, which rebutted such a presumption?

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Replying to Portia Nina Levin:
David Winch
By David Winch
01st Nov 2016 12:29

Portia Nina Levin wrote:

Did you groan inwardly when reading the Prest v Petrodel Resources judgement David, which rebutted such a presumption?

I am very familiar with the decision of the UK Supreme Court in Prest. They held that, on the facts of that case, the beneficial ownership of certain properties was with Mr Prest although the legal ownership was held in the names of various companies. As Lord Sumption said in that case at para [52], "Whether assets legally vested in a company are beneficially owned by its controller is a highly fact-specific issue".

But I cannot see that the decision in Prest should cause me to revise my earlier response. Are you suggesting that it should?

As Lady Hale put it succinctly in Stack v Dowden [2007] UKHL 17 at para [56] "The onus is upon the person seeking to show that the beneficial ownership is different from the legal ownership". Nothing in Prest has changed that.

David

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Replying to davidwinch:
Portia profile image
By Portia Nina Levin
01st Nov 2016 12:55

I was merely suggesting that it might not always be appropriate to groan inwardly.

We are told, in this instance, that the mother provided the £60K deposit, and that there is a deed of trust.

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Replying to davidwinch:
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By Justin Bryant
01st Nov 2016 14:08

But when would a prosecutor ever not take that view (in the absence of evidence)? They would not be a prosecutor for long if that were not the case, so that in itself says nothing to support your groaning here.

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By Justin Bryant
01st Nov 2016 13:11

There is nothing whatsoever to groan about there in my view and the presumption is pretty easily rebutted in this friendly family case and note Prest was a contested family case and so the presumption would have been more challenging to rebut there and a potential breach of one's mortgage terms does not necessarily equate to fraud (unlike lying about one's income to obtain the mortgage in the first place) and note this case as authority that (sometimes at least) it is acceptable for taxpayers to play games with banks: Terrace Hill (Berkley) Ltd [2015] UKFTT 75 (TC).

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By MBK
01st Nov 2016 13:15

Totally agree with Justin and PNL.

I don't see that there is any suspicion of mortgage fraud. One might suspect that the son is in breach of the mortgage agreement - but that is not reportable - nor is it anything to do with tax.

People get very exercised about the distinction between legal and beneficial ownership when, properly documented, a transfer of beneficial ownership without transferring legal ownership can actually be very helpful and actually zero risk.

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Replying to MBK:
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By henry williamson
01st Nov 2016 14:03

Yes, but when the mortgage lender finds out about the breach they will surely try to foreclose and enforce sale of the property.

If that is not possible because the trust deed really did legally transfer the beneficial ownership to the mother they will surely sue the son for the money anyway.

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Replying to henry williamson:
Portia profile image
By Portia Nina Levin
01st Nov 2016 14:50

You presuppose that (a) there is a breach of something (which there may not be) and (b) the lender has reason to doubt that they will not get their money back, despite their legally enforceable security, necessitating that they take some action.

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By Red Pepper
01st Nov 2016 14:11

Thank you to all of you. There are many good points here!
The summary seems to be that the normal exps should be tax deductible against the income, if HMRC accept the mother's beneficial ownership & liability to tax .

Some further facts: unfortunately these rents were not declared earlier, hence the HMRC have written to the the son (the legal owner).
The rents were paid by the agents into a separate bank a/c where mother and son are joint a/c holders, and the rent profits are held for the mother.

I wonder if this joint bank a/c would be sufficient evidence for the HMRC (in addition to the trust deed)?

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David Winch
By David Winch
01st Nov 2016 14:25

On the groaning inwardly point, the reason for that is that the different beneficial ownership will need to be established on satisfactory evidence. Whilst that may be straightforward, in many cases it is not.

On the mortgage fraud (or not) point, the issue will be whether the mortgage applicant dishonestly misrepresented the situation to the lender for the purpose of obtaining the mortgage. See for example s2 Fraud Act 2006.

On the reporting issue, the point is whether - on the basis of information which has come to him - the accountant suspects there has been either mortgage fraud or tax evasion.

David

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