Transfer of beneficial interest to a company

Transfer of beneficial interest to a company

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Client with a property business is thinking of incorporating and transferring the beneficial interest.  The mortgage will remain with the client.   

Wondered if company can still receive interest tax relief  if under an individual's name or does the mortgage need to be refinanced and be under the company name

 

Replies (61)

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By Ruddles
06th Jun 2017 15:10

(a) is the lender happy with this?

(b) what does the client hope to achieve by transferring properties to a company (possibly crystallising SDLT and CGT liabilities) but retaining the debt?

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Replying to Ruddles:
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By Jim100
06th Jun 2017 16:25

Hi

The mortgage company we will broach at some point should the client go head. It seems each lender have different rules

They are trying to achieve incorporation relief under Section 162 TCGA 1992 hence will avoid SDLT and Capital Gains. Though its still early days and just doing the ground work to see if it is achievable or not.

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Replying to Jim100:
By Ruddles
06th Jun 2017 16:37

I reckon that the best way of avoiding both SDLT and CGT charges on a transfer of the properties will be not to transfer the properties. So, there must be some other motive behind the incorporation - what is it?

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Replying to Ruddles:
The Landlords Union
By The Landlords Union
21st Jun 2017 07:27

I am very late to the party here. By the time I found this post via a Google search there had already been over 50 comments posted. Some of the comments were based on false assumptions. I have responded to some but do not have time to respond to them all.

However, below I have posted a link to a 17 page eBook which explains how and why this works and how to go about obtaining non-statutory clearance.

https://www.property118.com/wp-content/uploads/2017/06/Guide-To-Incorpor...

Further into this thread (around comment #50) I have posted a copy of an Open Letter sent to HMRC by the Managing Director of Property118 Limited, which points out some of the ambiguities in legislation, the 'Ramsay' case law and in particular HMRC's guidance notes on the tax treatment of landlords.

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By Portia Nina Levin
06th Jun 2017 15:31

More importantly, is the debt not secured on the property? If it is, then it is not possible, as a matter of law, for the property to be transferred independent of the debt. Albeit the individual is likely to remain jointly and severally liable with the company if beneficial ownership of the property is transferred to the company, subject to assumption of the debt secured upon it.

Obviously, there will be SDLT, which is what I assume you are trying to avoid. However, you are not, because of FA 2003, s 53.

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Replying to Portia Nina Levin:
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By Jim100
06th Jun 2017 16:27

Yes the debt is secured on the property therefore it is not possible for the company to claim interest relief ?

Anyway around this apart from transferring the legal ownership and mortgage to the company ?

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Replying to Jim100:
By Ruddles
06th Jun 2017 16:40

Why would you think that a company is entitled to tax relief for something that it doesn't pay?

EDIT - typed before reading the response below

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Replying to Jim100:
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By Portia Nina Levin
06th Jun 2017 16:51

If you transfer the beneficial ownership to the company, subject to the company assuming the responsibility for the debt, then you achieve what you are setting out to achieve, save that there will be SDLT (unless you are transferring from a partnership comprising connected individuals).

You may not need the lender's consent - your client will need legal advice on this point - but without the lender's consent the lender's recourse for repayment is most definitely against the original debtor, whilst the security can only be enforced against the company. With the lender's consent though, the original debtor may still be liable to make repayments if the company defaults. If they also default though, then the lender will enforce their security.

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Replying to Jim100:
The Landlords Union
By The Landlords Union
21st Jun 2017 07:12

Yes

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By Tax Dragon
06th Jun 2017 16:28

This is far from the first thread on this topic and you could save yourself (and us) some time by reviewing the others.

If the liability stays outside the company, then so does the obligation to pay interest. If the company pays it on behalf of the debtor, is what it is paying actually interest? You could structure it that way, by for example selling the properties to the company with the proceeds left outstanding. However, that produces taxable income for you while your loan (which you had used to buy the properties) no longer has an allowable purpose.

But if you don't structure it that way (and if you want s162 you won't be), what makes you think that what the company pays is interest?

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Replying to Tax Dragon:
The Landlords Union
By The Landlords Union
21st Jun 2017 07:14

If you would be so kind as to provide links to the other threads we would be very grateful.

There seems to be much confusion here and we would like to help to clear that up.

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Replying to The Landlords Union:
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By Tax Dragon
23rd Jun 2017 14:09

I have studiously been ignoring AWeb today (now you’ve joined you’ll soon find out that Friday is pedants’ day – and indeed I will no doubt be told whether I’m an oxy moron if I think it’s possible to ignore studiously!), but in doing my routine week end check of emails I came across your comment. I hadn’t previously noticed you had replied direct to me; I wasn’t deliberately being rude… sadly, that comes naturally!

So here I am again, Friday or not. You talk about the other threads but, honestly, I don’t see the point of reactivating those. Some folk may regret that I’m keeping even this one active by coming back to you… seems I’m also annoying by nature: to anyone who wants them, my apologies. If you were asking about the other threads because you wanted your audience, I imagine that anyone that was interested in those would (still) be following this one, so I don’t think you need to worry on that score.

I have a question though, if I may? In explaining legal and beneficial ownership in your eBook, you say that your standard deed includes a clause to the effect that the beneficial owner can call for the transfer of the legal ownership. You explain that, since the beneficial owner is controlled by the legal owner, s/he’s never going to call on him/herself to fulfil that requirement, so the conflict can be avoided. Why put it there in the first place? Why not simply leave the clause out and avoid the conflict? What happens if some aspect of company law or trust law requires the beneficial owner to call in the legal ownership?

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Replying to Tax Dragon:
The Landlords Union
By The Landlords Union
23rd Jun 2017 14:23

Thank you for answering your own question, at least in part, in your last sentence.

If that was ever the case (thought I cannot imagine a scenario whereby it would become necessary) then the company would be required to refinance the properties.

Please share your thoughts on how the scenario you have outlined might come to pass and the likelihood of it.

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Replying to The Landlords Union:
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By Tax Dragon
24th Jun 2017 07:35

Oh. My question was why have the clause. I'd assumed that the answer might be that it's there so that the beneficial interest company trust could be wound up once the company had refinanced. Maybe too it makes the refinancing easier.

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Replying to Tax Dragon:
The Landlords Union
By The Landlords Union
24th Jun 2017 08:24

The beneficial trust would indeed come to its natural end ("be wound up") at the point of refinancing. This is explained in the eBook I linked to. The refinancing at that point would be in the name of the Limited Company, hence the company would need to have the legal title of the properties conveyed into its name at that point. The company would not be wound up. There would be no additional CGT or SDLT payable at that point on the basis that it would all have been dealt with at the point of incorporation when 100% of the beneficial interest was transferred to the company. Incorporation relief s162 TCGA deals with the CGT and the business partnership exemption for SDLT at the point of incorporation deals with the SDLT.

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Replying to The Landlords Union:
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By Tax Dragon
25th Jun 2017 18:43

By the same token (that the company and legal owner would be on the same side, so to speak), would it not work in just the same way without the clause? When the time came to refinance, the legal owner would consent to transfer legal ownership.

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Replying to Tax Dragon:
The Landlords Union
By The Landlords Union
25th Jun 2017 18:58

I don't know the answer at the moment. Counsel put it in for a very good reason I'm sure. I will find out what it is and revert in due course. However, I'm on holiday now until 20th July.

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By ireallyshouldknowthisbut
06th Jun 2017 16:39

I think you client has been hanging around too many property forums.

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Replying to ireallyshouldknowthisbut:
By Ruddles
06th Jun 2017 16:41

... or pubs.

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By JCresswellTax
06th Jun 2017 16:44

im sure theres a boy on here that peddles this crap as if it works...

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Replying to JCresswellTax:
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By Tax Dragon
20th Jun 2017 21:30

A boy, a girl and today the peddler-in-chief. What is Miss Piggy's house made of? Or does it all rely on HMRC not having the resource to huff and puff? (My suspicion is that that will change, when HMRC draws breath and reviews the consequences of s24.)

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Replying to Tax Dragon:
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By Portia Nina Levin
21st Jun 2017 10:55

For the avoidance of doubt, the "boy" that Joan is talking about is carlh, who advocates "all singing, all dancing" trust arrangements.

I also have nothing to do with the Landlords' Union/Property 118, with whom I am only partially in agreement.

I advocate specific bespoke solutions to specific problems, based on specific legal advice, appropriate to specific circumstances. The fact that you have your doubts about things doesn't trouble me at all. And if it troubles other people, that doesn't trouble me either; quite the contrary.

And the last thing anybody needs is anybody seeking "clarity" from HMRC as to what they think a business is. It will only serve to galvanise their views.

It is a certainty that there will be litigation in this area, and having HMRC sit down and come up with a rigid "template" for when there is and when there isn't a business, can only serve to increase the amount of litigation; thus muddying the waters.

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Replying to Portia Nina Levin:
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By Tax Dragon
21st Jun 2017 13:01

I would be alarmed if my musings here gave you any worries at all; similarly, I doubt you’ll care much about my gratitude, although from my point of view you have explained with greater clarity in a few lines what others have failed to explain in 17 plus pages. Sadly, the merits of the arrangements are likely to vary from case to case. Some folk will undoubtedly have done (be doing) this on the cheap. There will likely be mistakes in the implementation in those cases. Those are likely the cases that HMRC will choose to litigate, hoping to achieve a victory with which to topple the more careful implementers like the proverbial house of cards. We’ve seen this HMRC strategy before, and it has worked before.

The result of this (apart from injustice) is that the technical analyses don’t get a rigorous examination in court; that saddens me, as it’s those examinations that would provide the greatest interest and insights.

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Replying to JCresswellTax:
The Landlords Union
By The Landlords Union
21st Jun 2017 07:17

Perhaps I'm the boy you are referring to. However, looking at your picture, you either look very young for your age or else I'm older than you so maybe it's not me you're referring to.

Nevertheless, I confirm that BICT is legitimate and we have obtained non-statutory clearances for clients using that structure to incorporate

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By Jim100
06th Jun 2017 19:39

Thanks for the replies. I guess he is no choice but to transfer the debt and incur additional financing and perhaps legal costs which he was trying to avoid.

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By MBK
07th Jun 2017 14:22

No Jim.
He can transfer and get relief for the interest - read PNL's posts carefully, because they are the posts that have the answers.
But beware also possible CGT. S162 relief is not automatically available.

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Replying to MBK:
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By Tax Dragon
07th Jun 2017 14:43

Hi MBK. Jim won't know, but you seem to. What makes YOU think that what the company pays is interest? The obligation it has is to the owner, not the lender. That obligation is not itself a loan.

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Replying to Tax Dragon:
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By Justin Bryant
07th Jun 2017 18:04

For good reasons, the LR provisions do not focus on interest on loans (which is not a black & white legal term - there's loads of case law on what that might be), but profits/losses & debits/credits on LRs (or related txns - s304), which are widely defined. Any alleged defect here can be easily cured under s303(3)(b) CTA 2009. Even if it was not a LR debit, why is it not deductible on general W&E revenue accounting principles?

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By Tax Dragon
07th Jun 2017 17:50

Justin Bryant wrote:

Any alleged defect here can be easily cured under s303(3)(b) CTA 2009.

I allege a defect and turn to s303(3)(b). I find that section refers to the rights of the creditor. We're talking about the debtor. Perhaps not so easily cured?

It may be W+E etc if it constitutes employment income of the director. If not, and it's a payment under an indemnity or similar obligation assumed in return for the property, is it not capital?

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Replying to Tax Dragon:
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By Justin Bryant
07th Jun 2017 18:20

Your s303(3)(b) point is misguided, as it could just as easily have said the liabilities of the debtor i.e. it makes no difference how you define the money debt from either the creditor's or debtor's point of view.

How can regular P&L payments such as this be anything other than revenue expenses (to be matched in the P&L with the rental income)? You would not capitalise them in the B/S would you?

Also see above re related txns.

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By Tax Dragon
07th Jun 2017 18:33

I don't concede the point re the company (it seems ridiculous so say that the law could have said something it doesn't say, so I'll read it as if it did), but I'm not the person best placed to pursue that point, as loan relationships is not my area of expertise.

Looking at it from the shareholder/director's point of view though, a personal liability is being serviced by the company. I will agree that the whole amount that the company pays on behalf of the director is taxable as income of the director. That sounds bad to me. What's your easy fix for that?

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By Tax Dragon
07th Jun 2017 18:36

I should clarify that I will agree (if you are telling me that regular payments cannot be capital) then they must be taxable as income.

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Replying to Justin Bryant:
By Ruddles
07th Jun 2017 19:13

This might be one of those rare occasions whan I'm tempted to agree with you. However, it all hinges on who owns what, who has granted what security to whom, who owes what to whom and who is paying what to whom. None of which is clear.

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Replying to Ruddles:
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By Justin Bryant
07th Jun 2017 19:27

Now you've got me worried if you're agreeing with me! The nominee analysis is a bit complicated and I would not set it out here. That said, I agree that ideally the bank should be informed in due course to achieve a formal novation/refinancing.

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By Tax Dragon
07th Jun 2017 20:41

Justin Bryant wrote:

I agree that ideally the bank should be informed in due course to achieve a formal novation/refinancing.

Until which time the bank continues to exercise its direct debit mandate against the original debtor?
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Replying to Tax Dragon:
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By Portia Nina Levin
08th Jun 2017 11:07

No the original debtor can cancel his direct debit and just bu88er off into the blue yonder if they want. They are just nominee for the company as beneficial owner. If the lender does not get paid they, as legal owner (by virtue of the mortgage), take possession of the property (which now belongs to the company) and sell it.

The original debtor cannot transfer, to any person, an interest in the property that is greater than the interest that they hold. Their interest is the right of possession of the property, subject to the lender's security interest as mortgagee, and absolute legal entitlement to the property once the loan has been fully repaid. That interest can only pass to a person who is assuming the obligation to service the loan, because the two things are not divisible from one another.

I've said more than I wanted to though, so my contribution ends here.

EDIT: Actually I would also add that CTA 2009, s 303(3) is not relevant, because the section determines a particular instance when a debt is a money debt. Here we know that the debt is a money debt, but there is a blurring of who the debtor is. At law the debtor is unchanged, but by virtue of the deed of trust we have strayed into the world of equity, and must examine the parties' obligations to one another, not on the basis of strict law, but on equitable principles.

Taxdragon's view is based on the individual/trustee/original debtor still being the debtor, because they are the debtor at law. However, at law they are also still the owner of the interest in the property, which we know they have equitably transferred to the company. Enough said though, I think.

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Replying to Portia Nina Levin:
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By Justin Bryant
08th Jun 2017 11:44

Portia, I more or less agree. However, the income tax point raised above by TD is the only good/sensible question I have ever seen asked about this nominee arrangement. The well publicised property118 website merely gives the following unhelpful guidance in the link below re that:
https://www.property118.com/beneficial-interest-company-trust/91418/
“The outcome is that the entirety of the business sits on the balance sheet of the company and all income and expenses associated with the property portfolio accrue to the beneficial interests company. HMRC have the right to treat payment of the mortgage as income arising to the settlor of the trust. However, the settlor of the trust (as bare trustees) would only be responsible for the flat 20% tax rate payable by trustees, hence a zero tax liability based on the ability to claim 20% tax relief on the mortgage interest.
Please note that a beneficial interest company trust is very different to a typical declaration of trust used by residential conveyancers to protect the interests of family members who contribute to a property transaction. Beware cheap imitations being offered by unregulated, uninsured and unqualified inspired amateurs, they are both plentiful and extremely dangerous.”

I agree this analysis is potentially valuable IP, so will not comment further on that particular point myself, but wondered what you might have to say about it (as you have not addressed it to date as far as I am aware).

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By MBK
08th Jun 2017 13:54

JB - the article you point to is interesting - but worryingly incomplete. Two major problems I immediately see with it.

Firstly, when it refers to the existence of a partnership they conveniently ignore S2(1) of the Partnership Act 1890 - which actually means that the vast majority of property rental businesses where there is more than one owner are not in fact partnerships at all (without which, of course, the SDLT relief on incorporation isn't available).

Secondly, there is the statement about SDLT relief being available once a partnership has been established for three or four years. Wrong. There is no time limit on the anti avoidance that catches a partnership formed for the purposes of avoiding SDLT.

It's very worrying for landlords. Only a very small proportion of property rental businesses can incorporate and legitimately avoid both SDLT and CGT on the way. But there are lots of "advisers" out there charging substantial fees who are simply playing on the lack of HMRC resources to identify and challenge incorporations that don't avoid one or both of these two taxes. When the proverbial hits the fan these advisers will, of course, be nowhere to be seen.

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Replying to MBK:
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By Justin Bryant
08th Jun 2017 15:47

I would not argue with any of what you say and I do not agree with what most of that article says, except for the above IT point being a potential issue and upon which I would be interested in PNL's views.

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By Portia Nina Levin
08th Jun 2017 16:01

I think the Property118 article is b*llocks Justin.

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Replying to Portia Nina Levin:
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By Justin Bryant
08th Jun 2017 18:22

OK; a different question. Assuming the above IT issue is a potential problem, would interest relief for the shareholder under s383 ITA 2007 solve it?

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Replying to Justin Bryant:
By Ruddles
08th Jun 2017 19:01

No

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Replying to Ruddles:
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By Justin Bryant
09th Jun 2017 10:02

Due to the ‘capital recovery condition’ (s393(2)), s383 ITA 2007 is only a potential full answer to the potential IT problem for interest only mortgages I think.

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Replying to Justin Bryant:
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By Tax Dragon
09th Jun 2017 10:42

You're not worried about s385(3)?

The stuff about a settlement is nonsense - it's an incorporation in return for shares, there is no settlement.

The IT charge I can see is on a director, not a settlor.

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Replying to Tax Dragon:
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By Justin Bryant
09th Jun 2017 11:14

Yes, again, I agree with you & PNL that most of the proeprty118 article is nonsense. I am only interested in this IT point mentioned therein, which again is the only good/sensible question I have ever seen on this nominee arrangement.

Possibly s385(3) is not relevant, as the loan has always financed the properties (i.e. one could argue that that is the continuing purpose of the loan and it should not matter if a sole BTL borrower forms a GP etc. with the loan continuing) and I agree that's a good point.

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By Tax Dragon
09th Jun 2017 12:01

Justin Bryant wrote:

Possibly...


Well, I'm convinced.
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By Portia Nina Levin
09th Jun 2017 12:16

If an argument can be sustained that the company is paying interest to the individual, who is, in turn, paying interest to the lender, then s 385(3) kills any hope of relief for the individual against the income so alleged to be received.

The loan in the individual's hands before the transfer was a loan for the purposes of their property business. After the transfer, if there is a loan from the individual to the company (which there isn't) it would qualify for relief based on it being a loan to a close company (which hopefully is not a close investment holding company), but for s 385(3).

The issue we have is that ownership of the proprietorial rights in the property and liability for the debt is in the hands of the trustee at law, whilst beneficial ownership of the mortgagor's rights over the property and effective liability for servicing the loan are in the hands of the beneficiary. Equity prevails.

The legal owner of the property, subject to the mortgagor's rights of possession and enjoyment, is the mortgagee lender until the loan has been repaid.

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Replying to Portia Nina Levin:
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By Tax Dragon
09th Jun 2017 12:34

The original debtor had sole rights of possession and enjoyment and sole liability to service the debt.

The new debtor may have sole rights of possession and enjoyment, but liability remains joint and several.

EDIT "remains" is obviously the wrong word. I was thinking in terms of the original debtor and a measure of liability "remaining".

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Replying to Portia Nina Levin:
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By Justin Bryant
28th Jun 2017 10:29

Thanks, although your final paragraph is unclear & it is not quite enough I think to simply say equity prevails without some case law justification of a similar employment tax situation (although I am not saying you are wrong re cases like Sports Club etc. where there is no net benefit to employee/director on different facts https://www.taxation.co.uk/Articles/2014/03/13/262251/performance-and-image).

[Edit] Reflecting further, I can see that the DoT can be similar to how 2 people can go on a mortgage (as TiC at HMLR) and in the DoT state that only one is responsible for the mortgage & will receive the entire net sale proceeds etc. and so the other has pure nominee status and has no benefit to speak of (from the other one paying the mortgage) except perhaps if the house burns down without insurance etc. and the mortgagee can then potentially go after the nominee for the shortfall.

Also, I note that the Sports Club "no profit" analysis was confirmed in the Apollo Fuels case in the link below and the recent legislative change re that should not affect this:

http://www.rossmartin.co.uk/sme-tax-news/2140-apollo-fuels-ltd-v-hmrc

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Replying to Justin Bryant:
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By Portia Nina Levin
09th Jun 2017 13:42

This has nothing to do with employment tax law Justin.

Earl of Oxford's case (1615) 21 ER 485

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