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March 14, 2017

BS Lidher v HMRC - When are assets 'jointly owned'?

The case of BS Lidher v HMRC in the First-Tier Tribunal has highlighted the important distinction between legal and beneficial ownership and the impact that joint ownership can have on the inheritance tax (IHT) exposure of a taxpayers' estates.

Those who hold (or think they hold) assets jointly should make sure their current ownership structures reflect their needs and intentions. This is particularly relevant for de facto, married, and civil partnered couples.

The Facts

  • The case focused on how a property was held between a mother, her husband ("the father"), and their son.
  • In August 2006 the mother died without a will (intestate) and the father became the administrator of her estate.
  • In October 2006 the father prepared forms showing that the net value of the mother’s estate was £72,000, below the nil rate band (£285,000 in 2006/07) above which IHT is due.
  • In March 2007 the father died and the son become the executor of his estate.
  • The son returned the full IHT form (IHT400) to HMRC showing the net value of the father’s estate as £307,408. This included the sale proceeds of a property which was purportedly held 50:50 between the father and son.
  • Only the father’s name was on the title deed of the property. Neither the mother nor the son had ever been named on the title.
  • HMRC issued a determination in August 2013 with the entire proceeds of the property sale now included in the father’s estate on the basis that he was the sole owner before his death.

The Case

The representatives of the family asserted that the property was held in the father’s name for “family reasons” and that the mother was beneficially entitled to half the property even though she was never a legal owner.

They went on to claim that the mother had always wanted her share to pass to her son on her death and asked the Tribunal to apply “common sense”.

HMRC contended that an intention to transfer was not sufficient and that transactions in land must be evidenced in writing. Therefore the father retained full legal and beneficial ownership of the property.

The Decision

Many taxes, including IHT, ‘see through’ legal ownership and are primarily concerned with beneficial ownership.

The Tribunal reiterated the established legal principle that where property is in the sole name of one person, there is no presumption that any part of it is owned by another.

Therefore to prove a beneficial interest without legal ownership, it is necessary for a claimant to provide cogent evidence of a common intention constructive trust, i.e. it must be shown the legal owner is holding the beneficial owner’s share on their behalf.

The Tribunal noted that no such evidence had been supplied and that the father had not included the property in the estate of the mother after her death.

Therefore the Tribunal upheld HMRC’s determination and found that the property was owned both beneficially and legally by the father before his death.

‘Joint Tenants’ vs ‘Tenants in Common’

A property held as joint tenants will automatically pass to the surviving tenants on the death of any tenant.

A property held as tenants in common will not automatically pass to the surviving tenants. Instead the deceased tenant’s share will either be distributed according their will or according to the rules of intestacy under the Administration of Estates Act 1925.

The Tribunal noted that in this case even if the property had been jointly owned (either as joint tenants or as tenants in common), the mother’s share would still have passed to the father on her death.

The fact that she died without a will meant that her estate was distributed according to the rules of intestacy. Therefore the first £250,000 of her estate would automatically pass to the father. This threshold would have been more than her net estate even if half the property had been included.

Contact us today to discuss your tax requirements.
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