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Who are beneficial owners?

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My client's father passed away and left inheritance to her two children, our client then used this money to purchase a property adding a small amount herself but mainly for her children who are younger than 18. No legal document or trust was set up at the time. All rents received have been declared on our client’s tax return. Our client’s solicitor has advised our client to make a declaration of trust stating that the children do have beneficial ownership, however, have the children had beneficial ownership from the purchase or only from when the declaration has been made? 

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By Tax Dragon
23rd Oct 2019 12:48

Ask her to clarify that with the solicitor.

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By The Dullard
23rd Oct 2019 13:05

When you're making 5h1t up after the event, usual practice is just to make up whatever 5h1t you like.

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Replying to The Dullard:
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By Tax Dragon
23rd Oct 2019 14:04

But make sure the fan is the other professional's, if you can.

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By AB_85
23rd Oct 2019 15:07

You say "my client's father passed away and left inheritance to her two children." You then say "no legal document or trust was set up at the time." Surely this is contradictory. What does the father's will say as to how the property passes on his death? That has to be the starting point in establishing beneficial ownership.

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Replying to AB_85:
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By The Dullard
23rd Oct 2019 15:21

I think what the OP is saying is that the client's father died leaving money that passed straight down to his grandkids (the client's kids), under his will, but because they were minors the client actually had legal ownership of that money, and she then used it to buy real property, which ought to be beneficially owned by her children.

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Replying to The Dullard:
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By AB_85
23rd Oct 2019 16:03

Noted and thanks. If that is the case, then I think the answer to the OP is that beneficial title to the property and the rents arising from it is unambiguously the children's from the date of the grandfather's death.

Presumably the solicitor is talking about registering a declaration of trust at the land registry. I don't think this has any bearing on beneficial ownership; it simply records the ownership on the public record.

If the mother has as a matter of fact been holding the income on trust for her children, then 'all' that has happened is that she has overstated her income because she has included rent on her tax return that she has no entitlement to. The tax return should be amended to reflect this.

If on the other hand mum has been enjoying the income from the property (and that is the reason why she has included in on her tax return), then she has misappropriated income properly due to her children. This isn't clear. Can the OP clarify? In practice, if this is the case, she should reimburse the kids and put her affairs in order going forward.

I am not clear how any of this involves "making 5h1t up"

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Replying to AB_85:
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By Auburn
24th Oct 2019 08:34

Thanks for your reply, I believe the mother has been enjoying the rental income which i assume means she should pay this back to the children or kept in an account until they turn 18.

It was the intention that the house was always going to be the children's and when sold the children would get the sale proceeds. My only worry is that as it was never documented HMRC may view this as she in essence borrowed money of the children to buy the property and now the declaration of trust is completed the beneficial ownership has changed from herself to the children and a capital gain at market value.

Do you think HMRC would accept although the declaration of trust has only just been done it only shows what has always been the beneficial ownership.

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Replying to Auburn:
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By Tax Dragon
24th Oct 2019 08:55

Sorry to repeat myself but apparently it needs to be said twice:

This is a legal matter on which you say the mother is taking legal advice. Defer to that advice - it should cover the point at issue.

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By AB_85
24th Oct 2019 23:50

I agree that this is a legal matter. Taxation always is - it arises out of statute and case law. The OP should certainly review any advice received from the solicitor and it should strongly influence their approach (to a greater extent, no doubt, than any comments, including mine, which are given on an open forum). However given that the OP has professional obligations to the client, I think it is perfectly reasonable for him/her to research the issue in an attempt to form his/her own view. The OP cannot defer to legal advice unless they are comfortable they have a broad understanding of the issue.

We are told that the children received an inheritance from their late grandfather's estate under his will. Because they are minors, the capital is held by Mum on bare trust for the children until they become 18. Hopefully you have seen the will and it is unambiguous on this point. Mum used these funds to purchase a property for the children. Hopefully there is a clear audit trail (eg bank statements) which confirms that the monies used to purchase the property came from the capital held for the kids. You say that it was always her intention the house was going to be the children's.

As the trustee of a bare trust for minors, Mum is entitled and required to apply the trust assets in the best interest of the children, and the purchase of property for an investment return would seem to be consistent with these duties.

The fact that Mum has collared the income and included it on her tax return is a problem in as much as any subsequent amendment to her return makes HMRC scrutiny more likely. However, if you are confident that it was always her intention that the property was held for the children, it follows from this that her actions arose from ignorance of the legal position regarding income. The fact that she has acted in breach of her duty as trustee in doing this does not to my mind provide sufficient ammunition to HMRC. I don't think it is a basis for them to allege that Mum borrowed (ie stole) the money from the childrens' trust fund.

I don't think the fact that no deed of trust was registered at the time is decisive either, although again it makes HMRC scrutiny more likely. There ought to be plentiful contemporary evidence (eg extracts from the will, correspondence confirming receipt of the inheritance, bank statements as above) to show that the property was always held in trust for the children and paid for with their money.

If you are confident of the facts, explain them properly and provide relevant evidence as above, then it sounds to me like there is insufficient basis for HMRC to contest it.

(As an aside, I would speculate that even if Mum did filch the money to acquire the property for herself - which you don't believe - it is strongly arguable that there is a constructive trust over the property in favor of the kids anyway because it was paid for with their money. This would mean the beneficial interest would still reside with the children. As I say, this is speculation. And it is in any case an argument one would not like to have to run)

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Replying to AB_85:
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By Tax Dragon
25th Oct 2019 00:32

The tax is decided by the legal position. The legal position is not decided by the tax. I think it is the case, therefore, that the finance professional should defer to the legal professional in situations like this.

You seem to think that will give a less favourable outcome. I would expect it not to.

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Replying to Tax Dragon:
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By AB_85
25th Oct 2019 18:03

I agree that the tax is decided by the legal position. This is invariably the case as beneficial ownership is the cornerstone of CGT.

I said that the OP should review and give great weight to the advice received from the solicitor, and he may wish to rely on it. I don't believe that this will give a less favorable outcome. I am simply giving my opinion, based on what the OP says, on the legal position as I understand it - to be clear, I am not a lawyer, I am ACA TEP - and noting that it is reasonable for the OP to attempt to understand the position for himself before he defers to the advice from the solicitor.

To my mind, the issue here is not so much the legal position regarding beneficial ownership, but how the OP goes about explaining this mess to HMRC after they open an enquiry into Mum's amended tax return

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Replying to AB_85:
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By Tax Dragon
25th Oct 2019 23:13

Just tell them the truth. What's the problem with that? The documentation from the solicitor will help. (I think we are more or less in agreement. I don't see 'deferring to' and 'understanding' as mutually exclusive - indeed they may even be mutually supportive.)

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Hallerud at Easter
By DJKL
26th Oct 2019 01:07

What about the contribution made by the mother used towards making the purchase; gift to children, loan to children, partial interest in property?

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Replying to DJKL:
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By Tax Dragon
26th Oct 2019 09:09

Surely the solicitor has advised on that, as that too is obviously a legal point. It's possible for instance that the lack of contemporaneous documentation renders a presumption of gift - I don't know; AB might, or Montrose is much more knowledgeable than me on such rules. If there is such a presumption, then the only issue I can see is whether the income attributable to the gift exceeds the threshold to be taxed on the parent. As it's already been taxed on the parent, the issue in unpicking that is one of quantifying the over-declaration.

Quantification is where the finance professional may find themselves with work to do, whether the answer is that the money was gifted or loaned, or whether parent bought an interest in the property. But whatever, the answer itself comes from, and the starting point is, the legal advice.

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By JoF
26th Oct 2019 09:18

The problem is the 'I believe' comment from the OP. Rather like the 'I'm guessing' from another OP this week. Why would you try to second guess accounts/tax prep or what HMRC might consider without full access to the facts?

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Replying to JoF:
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By Tax Dragon
26th Oct 2019 09:35

Good spot. When I said "de facto" below, I meant.... oh, anyone know the Latin for "the OP believes"?

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Replying to Tax Dragon:
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By Tax Dragon
26th Oct 2019 09:37

That said, one would imagine that the solicitor has ascertained the facts...

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By Tax Dragon
26th Oct 2019 09:31

Incidentally, although both AB and I have answered as if we expect the legal advice to be that the children have always had the beneficial interest, and that the deed of trust in question merely confirms that, it's possible that we're both wrong. If the legal advice is that mother, having de facto, albeit wrongfully, enjoyed the beneficial interest, had the beneficial interest (possession being 9 10ths of the law and all that), and the deed rights a past wrong, then I would go with that. Yes it means more tax, but it's so much simpler than quantifying, amending, dealing with the enquiries, arguing and so on that it might just be worth it.

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