Mark McLaughlin looks at when a property might be considered to be held on a constructive trust.
The distinction between legal and beneficial ownership of land and buildings (e.g., rental property) is important when it comes to identifying which individual is liable to tax on rental income, or capital gains tax (CGT) on any chargeable gain from a property disposal.
This is because CGT on property gains, and income tax on rental income, is determined by beneficial ownership, rather than legal ownership (NB this article considers the law in England, Wales and Northern Ireland).
Whilst the same person will normally be the legal and beneficial owner of the property, this will not necessarily be the case.
Prove it!
HM Revenue and Customs (HMRC) will generally assume that the legal and beneficial owners are identical, unless there is evidence to the contrary. HMRC’s guidance (in its Capital Gains Manual at CG70230) lists various indicators that a person has beneficial ownership of land.
In some cases, a ‘constructive trust’ may arise. Broadly, the parties may have an understanding (or a ‘common intention’) about beneficial ownership that differs from the legal ownership. HMRC’s Trusts, Settlements and Estates Manual (at TSEM9710) lists certain key questions to consider in establishing whether a common intention constructive trust exists.
Family and friends
Establishing beneficial ownership, and particularly whether a constructive trust exists, can be challenging (e.g., there is no legal requirement for a constructive trust to be in writing), but is not insurmountable.
For example, in Akhtar v Revenue and Customs [2025] UKFTT 395 (TC), the taxpayer was a director and shareholder of a taxi company. HMRC issued discovery assessments to the taxpayer. HMRC considered that the source of some funds used by the taxpayer to purchase several properties was the taxi business he ran, which reflected undeclared income. HMRC did not believe the taxpayer’s story that unexplained bank deposits came from friends and relatives. HMRC also asserted that the properties were beneficially owned by the taxpayer alone, not (as the taxpayer alleged) by himself and his wife. The First-tier Tribunal (FTT) had to consider (among other things) the source of the funds for the purchase of the properties, and who the beneficial owners of the properties were. This would determine who was responsible for CGT on the sale of those properties, and who was responsible for income tax on the rental income derived from them.
The FTT concluded that the contributions to the purchase of certain properties (A, B, C, and D) were (as the taxpayer asserted) made by the husband of the taxpayer’s sister (MA), and the contribution to the purchase of another property (E) was (also as the taxpayer asserted) made by a friend (DK).
Furthermore, beneficial ownership of B was vested in MA from the date that property was purchased until it was subsequently conveyed to the taxpayer. The FTT also held that beneficial ownership of E was vested in DK from the date the property was purchased until it was subsequently conveyed to the taxpayer. In addition, from the dates on which the beneficial ownership of B and E were conveyed to him by their beneficial owners, and from the date of acquisition of another property (F), those properties were held by the taxpayer on trust for himself and his wife, in equal shares.
Practical tip
The legal principles on the existence of constructive trusts are beyond the scope of a tax article. The FTT in Akhtar provided a helpful outline in the Appendix to its decision (tinyurl.com/TNA-FTT-Akhtar). However, expert professional advice is recommended.
