Legal interest and beneficial interest in property

| 5 min read

There are two types of ownership: legal ownership or beneficial ownership. We tend to assume that the legal owners are the beneficial owners, and therefore don’t differentiate between the two, but sometimes it is useful to do so.

When we talk about legal owners and beneficial owners, it’s usually in reference to real property - land and buildings. However, any possessions regardless of their value can be held in either or both ways.

What is a legal interest in property

A legal interest in property gives the owner a right of control over the property. That allows him or her to possess it, use it however he or she wishes, or sell or transfer it.

The legal owner is the person or people who are registered at the Land Registry on the title deeds.

What is a beneficial interest in property?

A beneficial interest is a right to the benefits of the property. Those benefits may be financial, such as a share of the rent or a share of the proceeds of sale when the property is sold, or they may be practical, such as the right to live in the property.

Beneficial owners are not registered on the title deeds at the Land Registry, and therefore it is hard for anyone who is neither a legal owner nor a beneficial owner to find out who the beneficial owners might be, and what benefits they have.

The legal owner and the beneficial owner may be the same person, but do not necessarily have to be.

When might property have different legal and beneficial owners?

Agreement between the owners

Two people or more people may buy property together. If they do so, the default ownership position is that they are legal co-owners as joint tenants, both equally entitled to the whole property. They may elect to own the property as tenants in common, where each owns a specified share.

By default, the beneficial interest follows the proportions of legal interest. If one owner has a legal interest in three quarters of the property, he or she has a beneficial interest in three quarters of the benefits of ownership.

One of the owners may wish to receive less rent from the property in order to compensate him or her for some other arrangement (not relating to this property) between the two. As examples:

  • one person may have contributed more savings to a deposit for a mortgage and therefore want more “interest”
  • a greater share in the rent may offset other costs between the two, such as the cost to one of being the manager of the property

Arrangements for unmarried couples

Partners who are not married to each other have fewer legal rights to the property of the other than if they were married.

A partner who is a sole owner of a property may want to give a beneficial interest in it to his or her long-term partner if the two are likely to remain unmarried.
However, he or she can retain control by remaining legal owner.

Loand for deposits for mortgages

Most mortgage lenders do not their borrowers "charge" the property to anyone other than themselves. Charging is the legal term for using the property as security on a loan.

It is common for parents or other family members to help their children buy a home, by lending them the money for a deposit for a mortgage.

However, the parents don't want to be legal owners because the mortgage company would require them to enter into the loan agreement. They may not want to be jointly liable for paying repayments, or being on the mortgage may affect their credit rating in some way.

However, because the mortgage company will not allow the property to have a charge registered to anyone else, the parents cannot use the property as security. They may feel there is a risk of not getting their money back if the couple split up.

A solution is for the parents to enter into agreement with the children to become beneficial owners. The parents are not registered on the title deeds, and therefore the mortgage company does not become aware of the agreement. However, the parents gain security over, for example, getting their loan repaid on the sale of the house.

Tax

The total amount of tax paid by both partners may be reduced by using up otherwise unused tax bands by re-apportioning the rent between them in a way that does not reflect legal ownership proportions.

Income tax is based on beneficial ownership, not legal ownership. By transferring beneficial ownership to the owner who pays income tax at a lower level, overall tax for both owners can be reduced.

Where property is held in trust

The trust (sometimes known as the bare trustee) is the legal owner, the name of which is registered as the owner at the land Registry. The beneficiaries of the trust are the beneficial owners, for whom the property is held on trust.

The trust deed, a private document, states the beneficiaries.

There are many types of trust arrangement. If the trust is a discretionary trust, then the rights of the beneficiaries are at the discretion of the trustees.

How to separate legal and beneficial ownership

Legal and beneficial ownership can be separated and defined using an agreement. Often this is known as a declaration of trust; it may also be known as tenants in common agreement.

The tenants in common agreement sets out the interest of each beneficial owner, either to all benefits, or to individual benefits.

Please note that the information provided on this page:

  • Does not provide a complete or authoritative statement of the law;
  • Does not constitute legal advice by Net Lawman;
  • Does not create a contractual relationship;
  • Does not form part of any other advice, whether paid or free.
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