Land can be owned in two ways: –
- legal ownership, giving the right to the legal interest in the land, and
- beneficial ownership, giving the right to a beneficial interest in the property.
The legal owner of a property is the person who owns the legal title of the land, whereas the beneficial owner is the person who is entitled to the benefits of the property.
The legal owner of a property is the person who owns the legal title of the land, whereas the beneficial owner is the person who is entitled to the benefits of the property.
What is the legal interest in a property?
The legal interest in a property refers to the right to possess or use property. This interest belongs to the legal owner, i.e. 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. The beneficial interest belongs to the beneficial owner, i.e., a party 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. The 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 is 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 and in the event of one party dying their share automatically passes to the other party) or as tenants in common (each tenant is entitled to a specific share of the property and upon death their share go as per their Will). This is called co-ownership of a property and both individuals’ names will be registered at the Land Registry, as the legal owners.
However, the joint legal owners of a property may want the beneficial interest to differ from the legal interest, e.g., if they want one of the party to be entitled to a higher share of the rental income or the interest in the property.
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 advice relating to issues concerning property issues please contact our Lee Pashen on leep@cplaw.co.uk or 0345 241 3100.
This article is written as a general guide and should not be taken as containing legal advice.
