What is the legal interest in a property?
The legal interest in a property refers to the right to possess or use property. It belongs to the legal owner, ie the person who is registered at the Land Registry on the title deeds. Legal interest gives the owner a right of control over the property, which means they can decide to sell or transfer the property.
What is the beneficial interest in a property?
The beneficial interest is an interest in the economic benefit of a property. It belongs to the beneficial owner, who is entitled to the financial value of the land, regardless of the title entries at the Land Registry.
In particular, beneficial interest gives the right to:
live in the property
a share of the rental income
a share of the proceeds of sale if the property is sold
The legal owner and the beneficial owner of land may be the same person, but not necessarily. In particular, legal ownership and beneficial ownership will be separated when two people decide to manage property through a trust: the legal owner - whose name is registered at the Land Registry - holds the property 'on trust' for the benefit of someone else, the beneficial owner. We say that the legal owner is the 'bare trustee', whereas the beneficial owner is the 'beneficiary'.
What's the advantage of differentiating legal ownership and beneficial ownership?
When the property is held jointly
Two or more people can decide to buy a house jointly, either as joint tenants (all tenants are equally entitled to the whole property) or as tenants in common (each tenant is entitled to a specific share of the property). This is called co-ownership of property, and both individuals' names will be registered at the Land Registry, as legal owners.
However, the joint legal owners of a property may want the beneficial interest to differ from the legal interest, notably if they want one of the partners to be entitled to a higher share of the rental income. For example, if A and B are the joint legal owners of a property, they may decide that A has a beneficial interest in 70% of the property and that B has a beneficial interest in 30% of the property. This will entitle A to 70% of the rent, while B will be entitled to 30%.
Doing so can provide tax efficiencies because the taxation of income is based on beneficial ownership, not on legal ownership. Transferring beneficial ownership to the partner who falls within the lower tax threshold allows for a larger share of the rental income to be assigned to that partner, and the overall tax can be minimised. For more information, read Buy to let tax implications.
Ask a lawyer if you have any questions regarding beneficial interest splits, in particular, if you wish to transfer 100% of beneficial interest to your partner.
When there is only one legal owner
A sole owner of a property may want their partner (either a spouse, civil partner or cohabitant) to have a share in the benefits of the property even though they have no legal interest in the property. Giving beneficial interest to a partner who is not the legal owner enables that partner to receive a share of the financial value of the land, such as rental income or sale proceeds.
How can beneficial interest be established?
The legal and beneficial ownership of property can be separated using a Declaration of trust.
A declaration of trust confirms the beneficial ownership of a property and sets out the respective beneficial interest of each tenant in common, regardless of the title entries at the Land Registry.
For more information, read Declaration of trust.
How do you find out who the legal owner of a property is?
The legal owners of a property are registered at the Land Registry and can be searched for on the Land Registry website.
In Scotland property is generally held in outright ownership (often referred to as ‘heritable title’); heritable title is similar to the concept of freehold titles in England and Wales. As a result, the laws of Scotland do not normally recognise the concepts of separate beneficial ownership (or interest) of such a heritable title. For more information, read Property ownership in Scotland.