Lee Sharpe looks at some key concepts of property taxation that are pivotal to HMRC enquiries.
The recent case Akhtar v HMRC [2025] UKFTT 00395 (TC) covers how ownership relates to the taxation of property income and gains, and ‘unexplained bank receipts’.
Background
Mr Akhtar had run a taxi company from 2006 through to around 2019 (including its successor).
In 2011, HMRC opened an enquiry into Mr Akhtar’s 2008/09 tax return, during which it transpired Mr Akhtar was registered as owning as many as six properties, but had not returned any rental income in the period 2008/09 to 2011/12. The first time Mr Akhtar included rental income in his tax return was for 2012/13 – a good while after the enquiry had commenced.
Furthermore:
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Each property was in his sole legal name (save the first, being in the sole name of his wife).
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The properties’ combined rental incomes were significantly higher than admitted by Mr Akhtar, or latterly included in his tax returns.
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Mortgages had been taken out to buy the properties. The incomes declared in the mortgage applications were much higher than returned by Mr Akhtar for tax purposes.
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There were numerous substantial deposits to the Akhtars’ bank accounts, not obviously attributable to known sources such as the taxi business.
Readers may reflect that HMRC might well have declared “House!” on his tax enquiry bingo card: cash-based business; taxi firm; inconsistent income declarations in mortgage applications; but no rental income declared.
It's not me!
In his defence, Mr Akhtar explained:
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He had no idea where the figures on the mortgage applications had come from; he had essentially handed over signed forms for the various mortgage brokers to fill in and submit on his behalf (likewise, Mrs Akhtar).
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The deposits had come from two wealthy individuals:
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Mr Abbasi, who was Mrs Akhtar’s brother-in-law but appears to have resided in Pakistan; and
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Mr K., a friend and also a Pakistani resident, who “wanted to invest in UK property”.
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In fact, two of the properties were held on trust for Mr Abbasi. Mr Akhtar might be the legal or official owner, but Mr Abbasi was the beneficial owner, and was taxable on the rental income therefrom; likewise, one property for Mr K.
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The single property in Mrs Akhtar’s name was similarly on Mr Abbasi’s behalf.
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The other properties that Mr Akhtar legally held were owned for both him and his wife as a couple, so he was taxable on only 50% of the income from those properties, and she on the balance.
Mr Akhtar was able to provide some documentary evidence in support of these assertions, including mortgage paperwork (notably in one example apparently from a lender’s records but unsigned by the taxpayer) and broadly contemporaneous declarations of trust in favour of Mr Abbasi, in relation to some of the relevant properties. Also, a letter from a UK bank confirming that the source of some of the queried deposits had indeed originated from Mr Abbasi.
Foreign tax authority
HMRC followed up Mr Akhtar’s assertions in relation to Mr Abbasi’s being the financier and owner of several of the UK properties with the Federal Board of Revenue of Pakistan (FBR). The FBR advised HMRC that:
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Mr Abbasi had filed tax returns in Pakistan during the years under review, but had declared nil income (so no income from UK property) and paid no tax thereon.
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Therefore Mr Abbasi would have been unable to provide either the capital for the deposits received by the Akhtars or to fund the subsequent mortgage payments on the properties attributed to him.
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However, the FBR stated that he was “known to be into real estate business”.
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They had initiated proceedings against Mr Abbasi for Pakistani tax on the UK rental income.
The case officer
HMRC’s case officer’s evidence included that he did not accept that there was a form of trust by which Mrs Akhtar could own half of these properties, alongside Mr Akhtar. Mr Akhtar was the sole legal owner according to HM Land Registry, and therefore the beneficial owner.
The HMRC case officer likewise took a dim view of the purported declarations of trust in relation to the properties supposedly funded by Mr Abbasi, although he did not go so far as to suggest that they were a sham. He did not perceive any evidence to support the taxpayer’s assertion that Mr K. had helped to fund one of the properties or had any underlying interest in that property.
The case officer did not profess to be an expert in trusts. He had not sought advice on trusts from others in HMRC, although he had considered HMRC’s manuals.
Legal ownership v beneficial ownership; Trusts
Most helpfully, the judgment confirms: “Tax liability, and in particular CGT on chargeable gains and income tax on rental income, is determined by beneficial ownership rather than legal ownership.” In other words, who is ultimately taxable depends on who gets the benefit of the use or application (or the disposal) of the asset, where it differs from whose name is on the HM Land Registry.
The judgment also states that, in relation to trusts, a constructive trust may arise where there is:
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“A common intention between the legal owner and the beneficiary that the beneficiary should have a beneficial interest in the property”, and
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“That beneficiary has acted to his or her detriment in reliance on that intention”
Critically: “contributions made by the beneficiary may corroborate direct evidence of intention and also show that the beneficiary has acted to his or her detriment in reliance on that common intention”.
Put differently, one can show that someone other than (or as well as) the legal owner has a beneficial interest, firstly by showing that together they intended that to be the case, and secondly by finding that the beneficiary has applied money, time, effort, etc., to that end. Here, the judge was happy to find from the Akhtars’ evidence that they had consistently conducted their affairs, sharing their wealth equally (including proceeds from property sales being deposited in a joint account).
In terms of ‘detrimental reliance’, Mrs Akhtar had undertaken maintenance and renovation work to some of the properties. In a nice twist, for the one property where Mrs Akhtar had not undertaken such work, the judge found that funds to help buy that property had come from the prior sale of a property she had worked on, so had a beneficial interest in; Mr Akhtar therefore had a stake in those initial purchase funds, and what they were then used to acquire – the problematic property.
Other points to note:
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The judge found it entirely credible that the Akhtars had been unwitting participants in successive mortgage frauds – and had been “stunningly unlucky” (HMRC preferred “inconceivable”). The judge found several pointers supporting the Akhtars’ contention that the forms had been filled in by the brokers.
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The FBR report did not help HMRC like they supposed; proving Mr Abbasi had not declared his own income for years was “miles away” from proving he didn’t actually have any money; that the FBR now wanted to tax Mr Abbasi on those properties lent rather more weight to the Akhtars than to HMRC.
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The case officer’s claim he had not sought specialist advice on trusts was strange, given he’d previously sought postponement of the hearing to do exactly that.
Conclusion
Eagle-eyed readers may have spotted that it took nearly two decades from the enquiry year in 2008 to judgment in April 2025, although to be fair, the case was first heard in 2023. There is a lot of useful stuff therein. The case notes reveal that, remarkably these days, the same HMRC officer had worked the case since at least as far back as 2015.
Under the circumstances, perhaps the question is not so much if he really did not take specialist advice, but why he did not.
