The importance of documenting property ownership

10 September 2018

It is surprising how often property ownership isn’t quite as the owners think it is. This risks arguments and unexpected outcomes, in terms of various taxes, and what can happen to ownership on a death. 

Before we look at the importance of documenting ownership, it is crucial to ensure that the difference between beneficial and legal ownership is understood. Legal ownership focusses on who is responsible for the property and who is the registered owner on the Land Registry. Beneficial ownership reflects who has the right to enjoy and benefit from the asset, whether in monetary or another form.

Taxation wise, we are concerned with the beneficial ownership. It is the person who has the right to the income or the proceeds of a sale who bears the tax liability, regardless of who legally owns the asset. Similarly, for Inheritance Tax (IHT) purposes, the beneficial interest determines if an asset falls within the Death Estate. It is therefore vital that ownership is clearly documented, particularly whilst those with historical knowledge are here and able to share it.

There are various ways to show ownership of property. There are two key ways farming partnerships, in particular, can document ownership:

Partnership agreements
Partnership agreements are very useful. Without one, Section 33 of the Partnership Act 1980 automatically ceases the partnership on the death of a partner. Partnership agreements also outline the terms the partners are to abide by and what each partner is entitled to, in terms of income shares and capital shares. Where these differ, a clear Partnership agreement is particularly important. 

Partnership agreements can also document the legal and beneficial ownership of assets held within the partnership, predominantly where land and buildings are concerned. Plans of the areas involved can also be included to add further clarity. Who owns buildings attached to land often needs thought to avoid potential confusion or conflict.

Capital accounts
The beneficial owner of property used in the partnership is easily recorded in capital accounts within the annual accounts.

There are also key tax benefits of bringing farmland onto the balance sheet of a partnership. The most influential relief in deciding whether land is to be held on the balance sheet is Business Property Relief (BPR). Land held on the balance sheet should qualify for 100% relief whereas land held outside the partnership but used by the business will only qualify for 50% relief. BPR is particularly effective in protecting the value of land from IHT where the market value exceeds the agricultural value, for example, due to development potential. 

A clear partnership agreement, complemented by capital accounts in the annual accounts, will help you protect your assets from IHT and avoid potential litigation. Ellacotts can help ensure you are in the best position you can be. Get in touch with Kerry O'Reilley on koreilley@ellacotts.co.uk or 01295 250401.