SDLT: a matter of trust

In the second of his two-part series on stamp duty land tax, Bill Chandler considers some of the idiosyncrasies that only arise on transactions involving trusts Trusts of land arise when the legal title to a property is held by persons who don’t ultimately own the property. Technically, a trust of land also exists whenever real estate is owned by more than one person, including a matrimonial home owned by two spouses. However, this article is concerned with situations where there is true separation of the interests, with the legal owners being different persons than the beneficial owners. Trusts are established for many different reasons. They may be motivated by reasons of tax efficiency or privacy. They can allow property to be held on behalf of unincorporated organisations lacking legal personality. A settlement may form part of arrangements for the management of a family’s wealth. The possibilities are almost endless. The stamp duty land tax legislation divides trusts into two categories. See also: The company you keep – when SDLT gets complicated “Bare trusts” exist where the trustee holds the property on behalf of one or more beneficiaries who are absolutely entitled to the property. This will include situations where the legal title is held by a nominee. Any other trust is categorised as a “settlement”. This will therefore include interest in possession trusts, accumulation and maintenance trusts and discretionary trusts. Bare trusts SDLT generally looks through a bare trust and treats the beneficiaries as the owner. It is therefore the beneficiaries rather than the trustees who are obliged to notify a land transaction and pay any SDLT due. This can lead to the slightly odd result that the buyer named on the SDLT return does not match the transfer. It also means that a subsequent transfer from bare trustee to beneficiary is not a land transaction, since the beneficiary is already regarded as owning the property for SDLT purposes. The look through rule is disapplied on the grant of a lease involving a bare trust (but not on assignments of existing leases). To circumvent the possibility of SDLT on rents being avoided by the grant of a lease to a nominee who then assigns the lease, the bare trustee is treated as the buyer or seller of the full interest. Settlements In contrast to bare trusts, SDLT treats the trustees of a settlement as the owner of the legal and beneficial interest in the property acquired. The trustees are therefore required to notify the transaction and pay SDLT like any other buyer. Although the trustees are treated as the owner when buying or selling, HMRC guidance confirms that a change of trustees in a continuing trust is not regarded as a land transaction. While there would not usually be any consideration passing in such circumstances, an SDLT charge could otherwise arise if the trust property was mortgaged. A trustee to beneficiary transfer will, however, be a land transaction. Furthermore, the legislation specifically provides that any consideration given for the exercise of a power of appointment or the exercise of a discretion is chargeable consideration for the chargeable interest thereby acquired. However, on a reallocation of trust property between beneficiaries, a beneficiary’s consent to giving up an interest in one trust property is not chargeable consideration for their acquisition of an interest in another trust property. Whenever trustees are required to notify a land transaction, the return may be signed by any one or more of the trustees. This overrides the general rule requiring all joint purchasers to sign a land transaction return. Residential property The introduction of higher rates of SDLT for additional residential properties (the so-called 3% surcharge) further complicated the position of trustees. The desire to assess the most appropriate persons required the basic rules for trusts to be further refined. The look through rule for bare trusts should ensure that the outcome is determined by the position of the beneficiaries. One tweak was, however, required. For the purposes of establishing whether higher rates apply, the special rules for leases are disapplied, so that leasehold interests are more sensibly deemed to be owned by the beneficiaries rather than the trustee. For higher rates purposes, settlements have been sub-divided. A beneficiary under a settlement who is entitled either to occupy the dwelling for life or to the income from the dwelling is treated as owning the property for the purposes of establishing whether higher rates apply (but not otherwise, so that liability to notify the transaction and pay the tax remains with the trustees). Where no such beneficiary exists, the settlement is subject to higher rates on all qualifying acquisitions, even if the settlement holds no other property. Acquisitions by trustees of all settlements are, however, specifically excluded from the “higher threshold interest” rules that apply SDLT at 15% of the entire purchase price to certain acquisitions of dwellings over £500,000 by corporate bodies. For bare trusts, the look through rule applies (with the special rules for leases once again disapplied), so that the status of the beneficiaries is determinative. Final words The separation of legal and beneficial ownership raises important questions for SDLT. Crucially, who should be treated as owning the property: the legal owner or the beneficiaries? Recent developments in the taxation of residential property transactions have accentuated the importance of understanding this distinction and ensuring that the correct treatment is applied. Bill Chandler is a professional support lawyer at Hill Dickinson LLP Picture © Dinendra Haria/SOPA Images/Shutterstock