What's In A Name?

The villa owned by the chairman of a company caused potential problems. TREVOR JOHNSON explains how they were overcome.

GERRY CAME TO see me with a problem. One of his corporate clients was the subject of an enquiry and, in connection with directors' loan accounts, a previously unknown villa in the Algarve had come to light. It had been purchased by the chairman and major shareholder some years ago via the medium of a company incorporated in Gibraltar. This is standard procedure: it simplifies conveyancing, and avoids Portuguese property transfer tax. The Inspector thought this discovery was wonderful, as here was a previously undisclosed associated company which would lead to a withdrawal of small companies relief for the last ten years or so.

The only escape route available was if the Gibraltar company was not carrying on any business at any time in the accounting period (section 13(4), Taxes Act 1988). For the most part, the villa was occupied by the chairman and other members of his family, but occasionally it was let out to third parties. As might be expected, he did not bother to tell Gerry about this. Well, after all, the rents were not really income, were they, and everyone knows that tax does not have to be paid on income if it is outside the United Kingdom, etc. Had it not been for the receipt of these rents, we may have stood a chance with that line. As it was, some other approach was needed.

There were also other issues:

• Was the Gibraltar company resident in the United Kingdom? If not, were the net rents assessable on the client under section 739, Taxes Act 1988?
• Was the chairman a shadow director, and therefore liable to tax on a benefit in respect of his own rent-free occupation and perhaps that of members of his family?

As we discussed how the villa was run and used, it became obvious that the answer lay in the chairman's own attitude to the property. He totally ignored the existence of the company. It was his villa, he paid all the running expenses, and he gave all the instructions to the property manager in Portugal. At no time was the company ever involved; no correspondence ever went to Gibraltar and no funds were ever received there.

The Gibraltar company was clearly only a bare trustee for the chairman. If that argument was accepted, the company could not be an associated company because it was not carrying on any business. Furthermore, its residence position would be irrelevant, and there could be no benefit on the rent-free occupation of the villa. There was still a tax liability on the chairman on any net rents, but that was a small price to pay in the circumstances.

Two types of ownership

Now, there is such a phenomenon as a tax Inspector who does not think all taxpayers are on the fiddle. Unfortunately, we did not have one in this case. He responded to the effect that he understood that we were now saying that the Gibraltar company 'is in fact a sham'. It became necessary to explain that it is a fundamental principle of English law that there are two types of ownership, legal ownership and beneficial (or equitable) ownership. In most cases, the two are in the hands of the same person. However, where the two types of ownership are split, the legal owner holds the property in trust for the beneficial owner. That trust may be an express trust, where the rights of the beneficiaries and the powers and duties of the trustees are set out in a deed, or it may be an implied trust which arises out of the operation of law or equity. This would arise where, for example, the beneficiary had provided all the purchase consideration for the property concerned and there was never any intention that the purchaser should have beneficial ownership. In such a situation, the beneficiary as beneficial owner would have the unrestricted right to require the purchaser or legal owner to transfer the legal title to him. Until that happened, the legal owner would simply be a bare trustee.

Trust issue

Earlier in the enquiry the client had said in response to a specific question that there were no trusts in existence. We addressed this issue by explaining that the client was a businessman and not a lawyer, and could not be expected to appreciate the legal significance of the situation. It was only after seeking specialist advice that we are now aware that a bare trust exists based upon the following facts:

• The whole purchase price was provided by the client.
• The client has paid net running costs.
• The Gibraltar company itself had no banking facilities.
• The property manager in Portugal was appointed by and deals only with the client; all statements and correspondence are addressed to the client.

As it turned out, the Inspector rang Gerry to say, rather grudgingly, that he had been advised that our argument was sustainable before the Commissioners and he should concede the point.

And the lessons to be learnt?

• An associated company does not necessarily have to be United Kingdom resident.
• There may be more around than you think.
• If an asset is in someone's name, that does not necessarily mean that the person concerned is the beneficial owner.

Issue: 3866 / Categories: