The case of Mr Tom Smith* versus HMRC has highlighted the importance of the distinction between legal and beneficial ownership as well as the implications of joint ownership on a taxpayer’s estate.

Tom's mother, Clare Smith, died intestate in August 2006 and his father, John Smith, became the administrator of her estate. In October 2006, John prepared forms that showed the net value of Clare's estate was £72,000, well below the inheritance tax (IHT) nil rate band of £285,000. Following his father’s death in 2007, Tom became executor of his estate.

Tom eventually returned the full IHT400 form in October 2012, which showed the net value of his father’s estate was £307,408. This included money from the sale of a property that was allegedly owned on a 50:50 basis between the father and son.

However, only the father’s name was on the title deeds to the property, with neither the mother nor son mentioned anywhere in the deeds. As a result, HMRC determined that the proceeds of the property sale were to be included as part of the father’s estate on the basis that he was the sole owner before his death.

According to representatives of the family, the property was held in the father’s name for family reasons and the mother was beneficially entitled to half the property despite not being a legal owner. The representatives asked the tribunal to apply “commonsense” and said the mother had wanted her share of the property to pass on to her son following her death.  

HMRC argued that an intention to transfer the share of the property was not sufficient and that the claimant needed to provide written evidence showing the legal owner was holding the beneficial owner’s share on their behalf. The tribunal noted that this evidence had not been supplied so upheld HMRC’s determination that the property was beneficially and legally owned by the father before death.

Paula Steele, managing partner at John Lamb Financial Planning, says: “This case demonstrates the importance of ensuring all necessary documentation has been supplied when submitting an IHT return in order to achieve the desired outcome.”

(* All names have been changed for the purposes of anonymity)