Who Pays the Tax? Understanding Legal vs Beneficial Ownership of Property

In the world of property ownership, what’s written on paper isn’t always what matters for tax.

You may think that whoever’s name appears on the land registry title is automatically responsible for reporting rental income or capital gains from a property. But in tax law, it’s not legal ownership that counts—it’s beneficial ownership.

This subtle but critical distinction can have major consequences for:

• Income tax on rental profits
• Capital gains tax (CGT) on property sales
• Disputes with HMRC about ownership
• Inheritance planning and trust structures

In this blog post, we explain:

• What legal and beneficial ownership mean
• Why HMRC looks at beneficial ownership for tax purposes
• How disputes can arise
• A recent case that illustrates the issues (Akhtar v HMRC [2025])
• Practical steps to protect your tax position

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💡 Legal vs Beneficial Ownership: What’s the Difference?

Legal Ownership

Legal ownership refers to who appears on the legal title of the property. This is typically recorded at the Land Registry. A legal owner can:

• Transfer or sell the property
• Sign contracts on behalf of the property
• Be recorded as the owner in official documents

In most cases, legal ownership is clear-cut.

Beneficial Ownership

Beneficial ownership refers to who actually benefits from the property—who receives the rent, or who is entitled to the proceeds from a sale.

This might be the same person as the legal owner, or it might be someone else.

Key Point:

For income tax and CGT, HMRC is concerned with beneficial ownership, not just whose name is on the title.

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🔍 Why This Matters for Tax

When HMRC considers who should pay tax on a rental property, they ask:

• Who receives the income?
• Who funded the purchase?
• Was the property held on behalf of someone else?

So even if your name isn’t on the title deeds, you may still be liable for tax if you are the beneficial owner.

Similarly, if you are the legal owner but someone else is the beneficial owner (such as a spouse, family member, or trust beneficiary), the tax liability may rest with them.

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👩‍⚖️ Case Study: Akhtar v Revenue and Customs [2025]

This case demonstrates how HMRC challenges beneficial ownership claims, and how the tribunal may interpret evidence.

The Background

• Mr Akhtar, a taxi firm director, was subject to an HMRC investigation.
• He had purchased several properties and received unexplained bank deposits.
• HMRC suspected undeclared income and treated him as the sole beneficial owner of the properties, arguing he was liable for both rental income tax and capital gains on sales.

Mr Akhtar’s Defence

• He claimed that several properties were funded by relatives and friends:

• Property B was funded by his sister’s husband (MA)
• Property E was funded by a friend (DK)

• He argued that he held some properties in trust for himself and his wife, 50/50.

What the Tribunal Found

The First-tier Tribunal (FTT) made several important findings:

• MA and DK had indeed contributed the funds to properties B and E.
• As such, they were the beneficial owners of those properties until formally transferred to Mr Akhtar.
• When the properties were later conveyed to him, he held them on trust for himself and his wife in equal shares.
• HMRC’s assumptions were not supported by sufficient evidence.

This case illustrates that beneficial ownership can override legal title—but you must be able to prove it.

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🧾 How HMRC Determines Beneficial Ownership

HMRC will assume that the legal and beneficial owners are the same unless you can show otherwise.

Their guidance (Capital Gains Manual CG70230) lists the indicators of beneficial ownership, such as:

• Who paid for the property
• Who receives rental income
• Who is responsible for mortgage payments
• Who pays the property’s expenses
• Any written agreements or trust deeds

They may also consider whether a constructive trust exists.

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🧠 What Is a Constructive Trust?

A constructive trust may arise where two or more parties have a common intention that ownership is different to what’s legally recorded.

Even if nothing was put in writing, a constructive trust can be implied by conduct or a verbal understanding.

⚠️ There is no legal requirement for a constructive trust to be in writing—but you must still provide credible evidence of the arrangement.

In Akhtar, the tribunal was satisfied that the funding and intention of the parties pointed to a trust arrangement.

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💬 Family and Friends: A Common Scenario

Many people buy property with family or friends, or accept money from relatives to help with deposits.

If the person giving the money expects to benefit from the property—and this can be proven—they may be considered a beneficial owner, even if they’re not named on the title.

Alternatively, a parent might gift money for a child’s home, but make it clear there’s no claim on the property. In this case, the child is likely the sole beneficial owner.

👉 The difference depends on the intention and documentation.

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🧾 Income Tax on Rental Income

HMRC will tax beneficial owners on rental income—even if they’re not named as landlords.

If spouses jointly own a property:

• They are usually taxed 50/50 under income tax rules (s.836 ITA 2007)
• You can elect a different split only if unequal beneficial ownership exists
• A Form 17 and evidence (e.g. a declaration of trust) are required

If friends or family share ownership, the default is to split income in line with beneficial interests—so legal title alone is not enough to determine tax shares.

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🏠 CGT on Property Sales

The capital gain on a property is taxed on the beneficial owner(s), not just whoever’s name is on the title.

So if you are the legal owner but someone else has a beneficial claim (e.g., they funded the purchase), you might share the gain, or not be taxed at all—but only if you can prove it.

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🔐 Protecting Yourself: What You Should Do

If you have joint property ownership, or arrangements involving family contributions, you should take the following steps:

✅ 1. Create a Declaration of Trust

A simple legal document can spell out:

• Who owns what share
• Who gets what income
• Who funded the purchase

This is strong evidence for both HMRC and legal purposes.

✅ 2. Use Form 17 if You’re Spouses with Unequal Shares

This tells HMRC that you want to be taxed in line with actual beneficial ownership, not 50/50.

• Must be submitted within 60 days of signing the declaration of trust
• Only available to married couples or civil partners

✅ 3. Keep Good Financial Records

• Bank statements showing who paid deposits or mortgage
• Rental income transfers
• Repairs and running cost contributions
• Correspondence confirming arrangements

✅ 4. Don’t Rely on Verbal Agreements Alone

If HMRC investigates, you’ll need written or financial evidence to support claims of trust, gifts, or co-ownership.

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⚠️ Common Pitfalls

• Assuming legal title equals tax responsibility
• Claiming beneficial ownership without evidence
• Not formalising arrangements with spouses or friends
• Ignoring Form 17 requirements
• Allowing tax returns to reflect the wrong ownership share

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🛠️ How Merranti Accounting Can Help

At Merranti, we regularly advise clients on:

• Structuring joint property ownership for tax efficiency
• Preparing trust declarations and Form 17 elections
• Dealing with HMRC challenges to rental income or CGT liabilities
• Clarifying family contributions and their legal implications
• Ensuring property transactions are tax-compliant and documented

Whether you’re a property investor, helping a child get on the ladder, or buying with a partner, we can make sure your intentions are reflected in your tax position.

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🧾 Summary Table: Legal vs Beneficial Ownership

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✅ Final Thoughts

Legal title is important, but for income tax and CGT, it’s beneficial ownership that counts.

If you’ve contributed to a property, or share its income, but aren’t named on the title—or if others have helped you fund your investment—it’s essential to:

• Document your arrangements
• Declare income correctly
• Understand your tax obligations

Getting this wrong could mean paying the wrong amount of tax, or facing an HMRC investigation down the line.

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📞 Need Help With Property Ownership and Tax?

Whether you’re dealing with co-ownership, setting up a trust, or facing HMRC queries about beneficial ownership, Merranti Accounting can help you:

• Set up clear, compliant ownership structures
• Handle income and capital gains correctly
• Avoid disputes with HMRC
• Plan for the future

👉 Contact us today for confidential, expert advice.