Lee Sharpe considers a recent tax case that may be of use to taxpayers whose family or friends have helped out with buying property.
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It is a common theme of direct tax law that the tax follows whoever is entitled to benefit, be it from the income in question, the use or enjoyment of an asset, or the proceeds arising from disposal. From a capital gains tax (CGT) perspective, HMRC’s Capital Gains Manual states at CG10702 (and echoed at CG10720):
‘The person chargeable is normally the `beneficial’ owner of the asset which has been disposed of. Any actions by nominees, bare trustees, [mortgage holders, etc.], are attributed to the beneficial owner so that any gain or loss accruing on an actual disposal of the asset by the nominee, etc., accrues to the beneficial owner (and not the nominee). The transfer of legal ownership between a nominee and the beneficial owner does not constitute a disposal for the purposes of TCGA 1992.’
Thus, we can have a scenario where the legal or ‘official’ owner differs from the beneficial owner (in England and Wales, at least; I understand that the law works less flexibly in Scotland). In most cases, the legal owners and the beneficial owners will be the same. But it is also reasonably common for them to differ – or that there be more beneficial owners than legal owners, such as might happen where the original sole owner marries, and their spouse acquires ‘only’ a beneficial interest, without formally ‘updating’ or changing the legal ownership.
In general, one party may seek to prove that they have a beneficial interest in property even if they are not recognised as a legal owner. This is frequently encountered in cases involving marriage or civil partnership and divorce, etc. Notably, HMRC’s guidance at CG65310 counsels that such beneficial interest in property may be recognised by the courts, or it may be established by agreement between the parties to a marriage or civil partnership but that, either way, it should generally be accepted by HMRC as having subsisted from the outset.
“But it's NOT mine…”
However, it is more common in CGT cases that the legal owner, when acting as nominee or trustee, wants to convince HMRC that they have no beneficial interest in a property – so they should not be liable to CGT on the property’s disposal.
In Watson v HMRC [2014] UKFTT 613 (TC), the tribunal accepted that one spouse had retained no beneficial interest in land previously held in a business partnership with her husband; she had, in fact, given up her beneficial interest in the land on retirement from the partnership years before the land’s sale – despite its still being held in joint names on the Land Registry, and her supposed share in the gain on that later sale having initially been included in her tax return.
In a similar vein, a relative or friend may have helped to finance the acquisition of a property, perhaps by stumping up the deposit monies or similar. Sometimes, the subsequent conduct of the parties will be strongly indicative of the true nature of the arrangement. For example, where one sibling simply lends a substantial capital sum, the ‘real owner’ sibling then occupies the property, pays down the mortgage, maintains the property and simply repays the same capital amount when the property is sold (see also ‘Counter-Presumptions’ in HMRC’s Trusts, Settlements and Estates Manual at TSEM9630).
In a ‘vanilla’ example (and assuming that the ‘real owner’ sibling wants to assist), the lender sibling will be able to point to all of the expenditure, etc., incurred by the other sibling over the rest of the period of ownership (perhaps also any income they received, if the property is subsequently let out). However, life is not always so straightforward; the recent case of Raveendran v HMRC [2024] UKFTT 00273 (TC) may serve as a good example.
Raveendran v HMRC
In that case, it transpired in the course of an enquiry into Mr Raveendran’s tax return for 2014/15 that he had ostensibly sold a property worth over £1m to his sister-in-law for just £350,000. HMRC raised a CGT discovery assessment on the basis that, for CGT purposes, the proceeds should be deemed at market value (one presumes not just because they were connected parties, but simply because there was an element of gift – TCGA 1992 ss 17, 18).
Mr Raveendran explained in evidence (supported by his brother):
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He acquired the freehold in 2005 for £300,000 on behalf of his brother, who ran a business from the property. His brother had been unable to raise a mortgage to acquire the property in his own name because he had recently been made bankrupt. While Mr Raveendran may have appeared to be both legal and indeed beneficial owner, he was acting only on behalf of his brother.
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Mr Raveendran had agreed with his brother that he, Mr Raveendran, would take out a mortgage on the property but his brother would settle up or effectively take over the debt within five years. Some nine years later, the brother was still impecunious but the mortgage was causing problems for Mr Raveendran personally, so a sale to Mr Raveendran’s sister-in-law was drawn up.
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He had been reimbursed as to £350,000, but the apparent surplus was likely to cover ‘stamp duty’.
Relying on the leading property law case of Stack v Dowden [2007] UKHL 17, HMRC stated that, where Mr Raveendran was the sole legal owner, the onus was on him to prove that he was not also the full beneficial owner, from the outset. HMRC argued that the brothers were attesting retrospectively, with nothing to prove the arrangement held from day one. The mortgage was in Mr Raveendran’s name, and even subsequent repayments appeared to come from his account. Mr Raveendran and his brother should ideally have drawn up a deed of trust in 2005. And even if he did not beneficially own the property outright because his brother was paying off the mortgage, his initial contribution should be reflected in part-beneficial ownership, rather than as a mere financier.
Mr Raveendran argued that the deposit monies had come from his brother, who had also funded the mortgage repayments in Mr Raveendran’s name. His brother had also demonstrably funded substantial improvements to the property (as well as ongoing running costs for the property).
Absence of evidence or evidence of absence?
The tribunal considered:
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(As already noted), property law cases such as Stack v Dowden primarily consider where a party is trying to prove they do have some (or some more) beneficial interest than might be inferred from the legal ownership. Here, the taxpayer was arguing he did not have any beneficial interest.
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The impressive efforts made by Mr Raveendran and particularly his brother to evidence their position, such as approaching his bankers (alas stymied by the time elapsed between purchase and proceedings). The nature of the arrangement, given the brother’s bankruptcy, was entirely plausible. Nor did the evidence point to any alternative scenario.
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While HMRC pointed to a lack of satisfactory evidence, absence of evidence is not evidence of absence; there was no evidence before the tribunal that pointed to the original transaction being anything other than a resulting trust in favour of the brother, as Mr Raveendran claimed.
Conclusion
One might wonder at the tribunal’s finding that there was no evidence pointing to an alternative scenario; the evidence might be seen to suggest, at first blush, no more than that the taxpayer had always owned the property outright. Clearly, the brothers’ testimony, etc., carried some weight.
This may not be the first time that readers will have come across HMRC arguing that taxpayer evidence given in the present day is ‘retrospective’ and without merit. I hope, in turn, that it will not be the last time a tribunal says otherwise and encourages HMRC to be less blinkered or prescriptive in their demands for taxpayer appellants to satisfy the burden of proof. Indeed, we might all want to help HMRC avoid being too rigid or dogmatic in its approach to taxpayers.
