Mark McLaughlin looks at when a constructive trust can arise and the potential capital gains tax implications.
On a property disposal by an individual, the legal and beneficial ownership of the property is normally transferred simultaneously. However, it is important to appreciate that legal and beneficial ownership are not the same; beneficial ownership is generally relevant for capital gains tax (CGT) purposes rather than legal ownership (NB this article considers the law in England, Wales, and Northern Ireland).
Potential indicators that someone is the beneficial owner of the property include that they occupy the land, receive any rental income from the land, and provided the funds to purchase the property (see HM Revenue and Customs (HMRC) guidance in its Capital Gains Manual at CG70230).
However, the risk of disputes with HMRC over the identity of the beneficial owner of property can be mitigated by a valid ‘declaration of trust’.
Being constructive
A ‘constructive trust’ can arise where there is an understanding (or ‘common intention’) between the parties over beneficial ownership, i.e., that one party will have a beneficial interest in a property and that party has acted to their detriment in reliance upon that common intention such that it would be inequitable for the other party to deny the interest. The common intention can be express or inferred.
An express common intention requires express discussions between the parties, although common intention can also be inferred from the conduct of the parties in appropriate circumstances. These broad principles emerge from case law authorities (e.g., Jones v Kernott [2011] UKSC 53).
Spot the owner
The establishment of a constructive trust can assist in determining not only the beneficial ownership of the property, but also the time of disposal for tax purposes.
For example, in Morgan & Anor v Revenue and Customs [2024] UKFTT 565 (TC), the taxpayers redeveloped their family home. The existing house and garden were given their own title, and the remainder were divided into plots. The appellants incorporated a company to carry out the development and sale of completed properties. The development of plot 3 commenced in July 2015. The house was fully constructed by February 2016. The completed plot 3 was transferred to the company in July 2016. The taxpayers considered that “in substance and in reality” the company was the owner of plot 3. The company engaged estate agents in November 2015. Plot 3 was sold on 14 July 2016.
Subsequently, the taxpayers’ advisers provided a declaration of trust to HMRC dated 30 July 2018, which stated that the company attained a beneficial and equitable interest in plot 3 on 1 July 2015, as a prerequisite for the development of the site and formal transfer of legal title. On appeal, the issues for the First-tier Tribunal (FTT) included whether there was a constructive trust which transferred the beneficial interest in plot 3 to the company in 2015/16 (as contended by the taxpayers), or whether the taxpayers had made a taxable disposal in 2016/17 (as contended by HMRC). The FTT found that the company acquired the beneficial interest in plot 3 on the commencement of works (i.e., during 2015/16), rather than the transfer of the legal title (i.e., during 2016/17). There was an express common intention that the company would acquire the beneficial interest.
Practical tip
A constructive trust is an exception to the general rule that a declaration of trust over land must be made by a written document (LPA 1925, s 53).
