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Unusual one - legal vs beneficial ownership

Client is in prison, quite complex situation

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Broadly, new client presented me with the following.  Mr A went to prison 12 months ago and transferred his rental property to sister. Sister felt uncomfortable and (I quote) "didn't want the property as she believed it should have been split between the other siblings" so accepted the property but transferred all rental income into the account of Mr A. 
 

Sister drew up a will stating that upon her death, the property should be left (back) to Mr A.  Sister since died and the property is in the process of being transferred back to Mr A (who is still incarcerated). 
 

Client believes Mr A should pay tax on rental income as he received it and Sister did not benefit whatsoever in any way. 
 

Also, Mr A's brother (Mr B) sold Mr A's property after he became imprisoned, due to negative attention arising from the crime committed. Mr B used the funds to buy a different property ready for when Mr B is released. This property has been rented out in the meantime. All rents have been paid into Mr A's bank account. 
 

Mr B intends to transfer the property to the name of Mr A imminently. Again, the only person benefiting financially is Mr A. 
 

Client again things that the rental income should go onto Mr A tax return.  CGT (regardless of who has the gain) will be covered by the AE. 
 

Client is obviously beieving that these properties have been simply held on trust for Mr A who (they assert) is the beneficial owner. 
 

I'm thinking this won't wash, without implicit declarations of trust. 
 

All parties are pensioners (including the imprisoned) so whoever pays the tax on the rental income, this will be at 20%, hence no loss of tax regardless. 
 

Any thoughts greatly appreciated while I decide whether to help them. 

Replies (20)

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By paul.benny
19th Jul 2021 10:11

Which of the persons mentioned is your prospective client?
How will you be able to do KYC?
Are there any issues around sources of any of the funds?

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By Tax Dragon
19th Jul 2021 10:16

How can someone bequeath something that they don't beneficially own?

But... stepping back from tax, will-writing etc issues... is this not screaming AML FAIL at you at the top of its voice??

(Caveat: of course I know nothing about the [overall] situation. I may be very wide of the mark. But... tread carefully.)

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By David Ex
19th Jul 2021 10:17

Which of the parties is your client?

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David Winch
By David Winch
19th Jul 2021 10:43

Can you check your question? "Mr B used the funds to buy a different property ready for when Mr B is released". Do you mean when Mr A is released?
Is Mr A likely to be subject to a confiscation order under s6 Proceeds of Crime Act 2002? If so, this may gobble up all his assets (including those he owns beneficially but not legally). In that event Mr A needs to consult his legal team ASAP.
David

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By Truthsayer
19th Jul 2021 10:48

You have got this utterly muddled. How can Mr B sell or transfer Mr A's property? It was never Mr B's to begin with, according to what you have written. And what's this about Mr B being released? Is he in prison too? I suggest you start again, and write properly.

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Replying to Truthsayer:
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By Manchester_man
19th Jul 2021 11:20

And I suggest you, Truthsaver, watch your tone. I meant Mr A - only one person is in prison. No need for insults whatsoever.

I have had a call from Mr B who’s brother is in prison (Mr A). I will update shortly, as I’m about to go into a meeting but couldn’t leave your comment without a response.

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Replying to Manchester_man:
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By Tax Dragon
19th Jul 2021 11:48

Manchester_man wrote:

I meant Mr A - only one person is in prison. No need for insults whatsoever.

It was obvious what you meant. Mistyping one letter (B for A) hardly merited the response you received.

David has made express the thought that was in my mind. But he's said it better than I would, so I'll wish you good luck, but I can't help further. I'm out.

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Replying to Truthsayer:
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By paul.benny
19th Jul 2021 11:31

B could sell A's property with a power of attorney .

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David Winch
By David Winch
19th Jul 2021 12:08

Thinking about this some more, I assume your client is (or will be) Mr B and that he is the brother of Mr A who is in prison.
From an AML perspective I would think you would need to do CDD on Mr B and on Mr A (as Mr A is the beneficial owner of assets held by Mr B which you will be acting in respect of).
I have no idea what Mr A has been convicted of. If it is something with no financial angle (GBH, for example) then no worries. However if it is, say, drug offences or fraud or theft, then I would suggest that you urge Mr B to seek legal advice. The danger for Mr B is that if any of these assets he is handling might be considered proceeds of crime then he looks to be concerned in an arrangement which facilitates "the acquisition, retention, use or control of criminal property by or on behalf of another person". That risks being a money laundering offence under s328 Proceeds of Crime Act 2002.
Mr B could find himself sharing rent free accommodation with his brother! (But could avoid that fairly simply with appropriate legal assistance now.)
Also you would have to consider carefully whether you needed to make a Suspicious Activity Report to the National Crime Agency.
So it could get messy ....
David

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Replying to davidwinch:
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By Manchester_man
19th Jul 2021 14:26

Thanks David and Tax Dragon. I am going to research my obligations with regard to the power of attorney re. KYC / AML and apologies for omitting the POA information.

It’s a long time since I had a client with POA.

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Lone Wolf
By Lone_Wolf
19th Jul 2021 13:40

What's he in the clink for? That could sway how we answer.

When I hear about pensioners going to the clink, I get Jimmy Saville vibes.

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Replying to Lone_Wolf:
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By Hugo Fair
19th Jul 2021 14:05

Jonathan King and countless others weren't pensioners when charged ... but what has your prurient interest to do with OP's scenario?
David has already provided useful hints as to what might be of relevance ... "If it is something with no financial angle (GBH, for example) then no worries. However if it is, say, drug offences or fraud or theft, then I would suggest that you urge Mr B to seek legal advice."

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Replying to Hugo Fair:
Lone Wolf
By Lone_Wolf
19th Jul 2021 16:18

Calm down fella. I was only after the source of the crime as it may have been relevant if of a financial nature. "Prurient interest" seems a touch of an overreaction.

Have I scratched some sort of nerve here with you?

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Replying to Lone_Wolf:
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By Hugo Fair
19th Jul 2021 16:30

An adequate impersonation of Michael Winner, I'll give you that ... but it'll amuse anyone that knows me that I've been asked/told to "calm down". In the words of an old boss, "If you want to know what laidback means, you can either watch Hugo in action or visit a morgue".
My point was that David had already pointed out the need to ascertain whether the crime was of a financial nature ... so your post was an irrelevance, whether merely looking for a cheap laugh or the word that seems to have got you riled.
Anyway, I'm back to watching paint dry ... it's more interesting than this chat.

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Replying to Lone_Wolf:
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By Manchester_man
19th Jul 2021 14:23

Mee too! Reading between the lines, I think the crimes are of that ilk. As often in these cases (if I’m right) it is the family that suffer, and Mr B has been left holding the financial can.

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Replying to Manchester_man:
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By Brend201
21st Jul 2021 11:49

And if they are "of that ilk", there must be a risk of the victim of the crime (surely even if it is GBH?) making a claim for damages - victims of crime have suffered injury of some sort. The difficulty is that most perpetrators don't have assets. Cases have been brought successfully in Ireland and the legal systems are not hugely different.

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By Manchester_man
19th Jul 2021 14:19

Hi all.
Thanks for the responses thus far. I omitted the important fact (when posting rather hastily) that Mr B has power of attorney to deal with Mr A’s financial affairs whilst he is in the ‘big house’.

So, my enquiry came from Mr B (brother of Mr A) who is in prison. I believe (albeit only through reading between the lines at this stage) that Mr A is in prison for historic crimes which I’m told he (still) denies. I didn’t ask for the specifics and they were not volunteered but I have my suspicions and if correct, the crimes don’t relate to anything financial.

Mr B (brother and POA) sold Mr A’s former home and purchased with the proceeds a home out of the area. The property is in the name of Mr B but is soon to be transferred into the name of Mr A.

Rental income exists, as, rather than leave it vacant in the interim, it has been rented out. Mr B has deposited all rents into Mr A’s bank account, minus any necessary expenses. I’m fairly satisfied that this property is (to all intents and purposes) held on trust for Mr A, as Mr A is benefitting from the rentals and is ultimately going to be the legal owner. However I would be happier if a declaration of trust had been drawn up at the time.

The second issue is that Mr A gifted another property (also let out) to his Sister, who apparently “didn’t want the property” and felt uncomfortable taking it, so she kept all rents in an account and paid the lump sum into Mr A’s bank account after he became imprisoned. She also drew up a will stating that in the event of her demise, the property should revert to Mr A.

Said sister has now passed away and the property is being transferred (pending probate) back to Mr A in accordance with the terms of the will.

Mr B (prospective client) believes (similarly to above) that the rental income (which has been paid to Mr A as a lump sum by the deceased sister) belongs on Mr A’s tax return for 2020/21 as he is the sole (ultimate) beneficiary of the rental income.

I understand legal vs beneficial ownership but in the case of certainly the second property, I don’t see anything that would support this being beneficially owned by Mr A, other than the fact that the rents have subsequently been transferred to Mr A’s bank account. Yes Mr A previously owned this property and yes he will soon own it again, but the part in the middle, in my opinion, does not amount to beneficial ownership on the part of Mr A. I suppose the prospective client could argue that a verbal trust existed?

There is no tax advantage to the rent being charged to one party over the other - HMrC will get their small amount of tax either way.

Just a very strange case that got me thinking so I thought I’d put it to the house!

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Replying to Manchester_man:
David Winch
By David Winch
19th Jul 2021 14:48

Some thoughts.
You could google Mr A's name (and perhaps add a word such as court or convicted) and likely you would soon learn the nature of his convictions. Let's assume, as you suggest, that they are non-financial.
As far as the house purchased by Mr B is concerned I would think it likely that if it was purchased with the proceeds of sale of Mr A's house (sold under a power of attorney) then a 'resulting trust' or 'constructive trust' exists in favour of Mr A (even though there is no trust deed). So in effect Mr A is the beneficial owner & entitled to the rents (with the obvious tax return consequences).
As far as the property gifted to the sister, it seems clear that she became the beneficial owner (or it would not be in her estate on death). Perhaps you need to liaise with her executors to ensure that the rental income is declared by her. The net rental income will then simply be a family gift to Mr A from his sister I would have thought.
I hope that helps.
David

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Replying to davidwinch:
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By Manchester_man
28th Jul 2021 11:30

Thanks David, I've sent you a PM.

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By Calculatorboy
20th Jul 2021 22:03

this is not legalweb.co.uk

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