A Matter of Trust: Implied Trusts & Capital Disposals
When looking at the capital gains tax (CGT) position following a disposal of an asset, it is important to understand that CGT follows the beneficial interest in the property (as opposed to the legal title).
Establishing the owner(s) of the beneficial interest should be considered on a case-by-case basis. The case of Asif Bhikhi v HMRC (2020) demonstrates the importance of properly documenting transfers of property which can often be overlooked in transactions between family members. In this case, the First-Tier Tribunal (FTT) held that there was insufficient evidence to demonstrate that the appellant retained their beneficial ownership of a property on a transfer. In any case, even if there had been an implied trust in place, the transfer of the legal interest in the property would nevertheless have been treated as a disposal for capital gains purposes.
- Asif Bhikhi (the appellant) and his brother Sajid acquired a property at in 2001.
- In 2012, both Asif and Sajid were were convicted of fraud and subject to penalties from the Crown Prosecution Service of £212,861 each.
- Due to the order they were unable to mortgage the property to raise the funds required to meet this obligation, so they entered into an agreement with their relative Irfan, under which the property would be transferred to a company he owned (MIS) for consideration of £499,000. These funds were to be raised by MIS mortgaging the property.
- It was agreed that Asif and Sajid would continue to manage the property, but would pass the rents to MIS to meet the mortgage payments. During this period, the property was shown on MIS’s balance sheet and it paid tax on the rental profits.
- Asif did not declare a capital gain on the sale of the property, claiming that only legal title had been transferred and he and his brother Sajid had retained the beneficial ownership of the property.
- HMRC raised a discovery assessment in relation to the 2012/13 tax year on the basis that the transfer was a disposal for CGT purposes and charged a penalty for an inaccuracy in a tax return.
Asif argued that it was understood that the property was to be transferred to MIS on trust, and once his business was ‘back on its feet’ the brothers could get the property back. In practical sense, very little changed after the property transfer – they continued to look after the property, dealing with repairs, and liaising with the tenants. When asked why they did not declare the rent received, he replied that it was because all the rents had been paid to MIS to meet the mortgage payments.
HMRC were unable to accept Asif’s claim that the property had been held on trust, and argued that the evidence pointed toward both the beneficial and legal interest being transferred.
A number of key documents were produced in relation to the transaction, including:
- Land registry form TR1 – the box for ‘declaration of trust’ had been left blank
- A letter from 2012 by the solicitors acting for the brothers which referred to the transfer as a ‘sale’
- A conveyancing agreement which incorporated the standard conditions of sale
- A letter from 2016 signed by Ifran as director of MIS which stated the company held the property on implied trust for Asif and Sajid, who would be entitled to all capital profits and remain responsible for upkeep and maintenance.
Based on the evidence provided, the FTT held that the transfer of the property from the brothers to MIS was a disposal for CGT purposes. The equitable interests were disposed of by the Conveyancing Agreement, followed by the transfer of the legal title by deed in the Form TR1. Furthermore, the evidence pointed away from there being a trust in place, specifically the unchecked ‘Declaration of Trust’ box on Form TR1 and the fact that payment had been made for the transfer. In any event, even if there were an implied trust, the settlement of property into a trust is a market value disposal for capital gains purposes and a liability to CGT would have nevertheless arose.