Chapter 8 The Law of Property Flashcards
8.2 Law of property – a tax context
Capital gains tax is charged on the disposal of an asset. Inheritance tax is charged on the value of an individual’s estate at their time of their death. In order to apply these provisions, it is essential to know what is meant by property.
8.3 What is property
Property is anything which is capable of being owned by a person. Colloquially the word property is used for a building, this is not an accurate legal use of the word.
8.4 Classification of property
English law – in English law property is categorized either as realty or personalty. There is only one kind of realty and that is freehold land. All other property is personalty. This is divided into chattels real and chattels personal. There is only one kind of chattel real and that is leasehold land. Chattels personal are divided into:
• Choses in possession – tangible moveable property capable of physical existence
• Choses in action – intangible property that does not have physical existence but is still a thing capable of ownership. Generally speaking, all types of intangible property tend to be rights.
8.5 Fungible Property
An item of property is fungible where it is made of individual units where each unit is identical and the item of property is dealt in without identifying the particular units involved. Shares in a company, money in a bank account are examples of this. Units of the same kind such as the successive acquisition of shares of the same class in a company are treated as indistinguishable parts of a single fungible asset. The shareholding makes up one single asset with each share being a fractional part of the undivided whole.
8.6 Intellectual property - types
Intellectual property is an example of a chose in action. Such property is subject to the intangible fixed asset regime for corporation tax. An IFA is an intangible asset used in the course of a company’s activities.
Types of intellectual property – owners have rights to prevent other persons from carrying out activities involving the property; intellectual property rights are perceived as negative rights. Prevention rights are in the form of monopoly rights and anti-copying rights and prevent others from making use of the property and copying the property. The following are types of intellectual property:
• Patents – monology rights over inventions that satisfy certain criteria, needs to be registered. Main legislation is Patents Act 1977.
• Trade marks – monology rights in a sign which is capable of being represented graphically and of distinguishing goods or services of one undertaking from those of another undertaking. They can involve designs, names, words, numerals, the shape of goods or sounds. They need to be registered but unregistered trademarks can be protected by pursuing a common law action for passing off. Main legislation is the Trade Marks Act 1994.
• Copyright – anti-copying rights in an author’s literary, artistic, musical and other works. Also, databases, moral rights and rights in performances. These are collectively known as neighboring rights. It is not necessary to register as both the rights and their protection arises automatically. Main legislation is the Copyright, designs and patents act 1988.
• Designs – the rights of a design owner in their design. Registration is required for protection under the RDA, unregistered designs are protected by CDP. Registered designs act 1949 and the copyright, designs and patents act 1988 is the main legislation.
• Others – if commercial or personal confidential information is given under conditions of confidence, there may be a right to prevent the misuse of the unauthorized disclosure of that information. For example, a know-how which could be the secret ingredients or a show-how which is a form of know-how in which the confidential information is conveyed by practical demonstration rather than in writing.
8.6 Intellectual property - protection and licencing
Protection of intellectual property – most types are protected by registration both in the UK and abroad. In the UK the Intellectual Property Office carries out the registration role. Protection from unauthorized use or copying only extends for defined periods of time:
• Registered patents can be protected for up to 20 years (registration renewed every 5 years)
• Registered trademarks can be protected for 10 years, and can be renewed for further periods of 10 years
• Copyright is protected for a period of time depending on its nature. At the end of the period, protection from copyright expires.
Licensing and franchising – a licence for IP is an agreement that the owner of the IP will not sue another (the licensee) for use of the IP. Licences may be non-exclusive or exclusive. An exclusive licence can limit aspects of how the licensee uses the property, for example it can only be used in a particular country. The licensee pays a royalty for the IP.
Franchising is a form of licence where they authorize someone to carry on business under the business format. The franchisee buys into a proven business model, under the agreement, the franchiser is able to control their activities to protect the business’ name. the franchisee is typically granted a licence to use trademarks, designs and know-how of the franchisor.
8.7 Relationships with property
Possession – a person possess property if they are able to exercise control over the property or has the power of exercising.
Ownership – this is when a person enjoys innumerable rights over property such as the right to use property, the right to alter or destroy the property, the right to sell the property and the right to recover possession of the property from all other persons. These rights do not exist separately and are merged into one general right of ownership.
The rights of ownership may not necessarily be absolute, the rights may be limited but that does not detract from the existence of ownership.
The rights of ownership are divisible. This means one or more of the collection of rights may be divided up or detached without depriving a person of the ownership of the property. Also parting with the right to use the property does not necessarily result in a loss of ownership.
Ownership at common law and in equity - ownership is a concept recognized by both the common law and equity. The common law recognizes only a limited number of the rights of ownership. Equity recognizes all the rights of ownership. Where a person has both the legal and equitable ownership of property at the same time, they are said to be the absolute owner of the property.
It is possible for more than one person simultaneously to enjoy the equitable and legal rights of ownership in relation to an item of property, the property is said to be in the co-ownership of the persons concerned. Normally property is in sole ownership. This is not to be confused with the division of rights of ownership between two sets of persons at the same time.
It is possible for the rights of ownership to be divided so one person enjoys the legal rights of ownership and another enjoys the equitable rights of ownership, when this occurs a trust is created and the property becomes trust property.
8.8 Co-ownership of property
In English law property may be co-owned as a joint tenancy or a tenancy in common.
Joint tenancy – where a single item of property as a whole is owned by two or more persons together, it is not divided into shares. Rather the co-owners own the whole item of the property together. This is the only type of co-ownership recognized in common law (also recognized in equity). The consequences of this are:
• Each co-owner is entitled to the rights of ownership in relation to the whole of the item of property.
• No single co-owned is able to alienate (sell or gift) the property without the joint agreement of all the other owners. Any attempt to do so may have effect in equity but not at common law
• On death of the co-owners, the property continues in the ownership of the surviving co-owners (ius accrescendi or the right of ownership). The deceased’s interest in the property accrues to the survivors. The deceased is unable to leave the property in their will to their beneficiaries.
Any one of the co-owners is able to separate their equitable interest from the other joint tenants by means of a severance. This must be in writing and delivered to the other owners. Their consent is not required.
From the moment of severance of ownership of the property converts into a tenancy in common and the right of survivorship no longer operates. Where a co-owner severs their share of the property, they will be entitled to a proportionate share of the property and be able to deal in their share without recourse to the other co-owners. The severance takes effect only in equity.
Tenancy in common – two or more persons own property as tenants in common where each owns an undivided share in the property. Each co-owner has a notional individual share in the property but the property is not physically divided into shares or fractions. The individual’s shares may be unequal shares. Tenancy in common is recognized only in equity. The consequences of this are:
• Each co-owner is entitled to the rights of ownership in relation to the whole item. But the income arising from the property belongs to each owner according to their proportional beneficial interests
• A single tenant in common is able to alienate the ownership if the property without the joint agreement of all the other tenants in common
• On death of one of the tenants, their interest in the property is not added to the other surviving tenants in common. They are able to leave their share in the property in their will or pass it to their successors
• Where co-owners own property as tenants in common, they are not able to convert their ownership into a joint tenancy.
8.9 According the ownership of property
Formalities and timing of acquisition – the formalities that must be observed in transferring the ownership of property from one person to another depends upon the type of property being transferred:
• Choses in possession – ownership transferred by physical delivery of the item or the means of control of the thing.
• Land – transferred in writing by the completion of a transfer document or a document called a conveyance.
• Shares – ownership of shares must be transferred in writing by the completion of a document known as stock transfer form
The point in time when the transfer of ownership occurs again differs in each case depending on the type of property:
• Chattels – ownership is transferred on delivery
• Land - ownership transferred when the land register is altered
• Shares – ownership is transferred when the company share register is altered
Acquisition of property under a joint tenancy – property is acquired by persons as joint tenants where the four unities are present at the same time. The four unities are as follows:
• Unity of possession – every co-owner is entitled to every part of the co-owned property and cannot exclude any of the other co-owners from the same enjoyment.
• Unity of interest – the interest of each co-owner in the property must be identical in extent, nature and duration.
• Unity of time – the interest of each co-owner must start at the same time
• Unity of title – each co-owner must derive their title from the same source
Acquisition of property under a tenancy in common – in English law only the unity of possession needs to be present between tenants in common. To prove ownership as tenants in common, the co-owners may point to the document of transfer of the property concerned which may state the type of co-ownership they want. Other factors to take into account are contributions to the purchase price and the relationship between the parties.
The acquisition of property as tenants in common is difficult if property is purchased in the name of one individual but intended that the ownership is shared. If this is the case the purchaser can make a written declaration that the property is to be held on trust for them and the co-habitant as joint tenants in equal beneficial shares. But in absence of a declaration the legal position could be that the property is in the sole ownership of the legal owner.
8.10 Location of Property
Tax treatment can depend on where property is located. It is important to identify where property is situated by applying the lex situs rules. The following rules apply to identify the location of property:
• Item – location for common law purposes
• Land – where it is physically situated
• Chattels – where they are physically located
• Rights under debts – where the debtor resides
• Shares – where the company’s share register is kept
• Goodwill – where the business is carried on
Some statutes can alter the lex situs rules in certain situations.
