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Property ownership comes in two forms: legal ownership and beneficial interest. The two are usually united, but they can be separated. The legal owner of a property is the person who is registered at HM Land registry, whereas beneficial owners are entitled to enjoy the economic benefits of the property, e.g. to occupy it and/or to receive a share of the net sale proceeds and rental income.
What’s the advantage of separating legal ownership and beneficial interest?
Doing so can provide tax efficiencies, because the taxation follows beneficial interest, not legal ownership. In the case of a business partnership, profits can be allocated disproportionately to beneficial ownership too. Also, it is only possible for up to four legal owners to be registered at HM Land Registry. Some partnerships have significantly more partners.
How can beneficial interest be established?
Legal ownership and beneficial interest in property can be separated using a Declaration of Trust.
A Declaration of Trust confirms the share of beneficial interest in property, regardless of the title entries at the Land Registry.
What if the property is mortgaged?
Beneficial interest is of no interest to mortgage lenders because it doesn’t affect their security. A Declaration of Trust is essentially a contract between two or more parties to document how the economic benefit in the property is split. Once beneficial interest is jointly owned, then a partnership can be formed. The security taken by a mortgage lender over-arches this, hence it is unaffected.
A Declaration of Trust is a contract between the legal and beneficial owner. The contract between the mortgage lender and the legal owner is a separate contract, which is why the lenders security and the legal owners responsibility to the mortgage lender remain unchanged.
Owners of beneficial interest do not usually have any legal responsibility to the mortgage lender, unless the mortgage is in their joint names, but a beneficial owner can and often does have a legal responsibility to the legal owner of the property for his/her share of the all liabilities arising from the property, including the mortgage. This will be documented in the Declaration of Trust, and may or may not be varied in a partnership agreement.
Once beneficial interest is shared between two or more persons, then a partnership can also exist, subject to the property being used for business purposes of course, e.g. let to tenants with a view to making profit. The legal definition of a partnership is contained in the Partnership Act 1890 and is described as “the relation which subsists between persons carrying on a business in common with a view of profit”Show Form To Book A Tax Planning Consultation