TQOTW: Trust Acquisition

My client and his wife are the trustees of a trust that is looking to acquire a 999-year lease in a residential property. The trust does not currently own any other residential properties. What are the SDLT implications of the transaction? Will the 3% SDLT surcharge apply? I seem to be getting a few queries regarding SDLT and trusts, but I am not familiar with the SDLT position surrounding trusts and would be grateful for an overview of the position.

All legislative references are to Finance Act 2003 unless otherwise specified.

In order to be able to assess the SDLT implications, it is necessary to establish what kind of trust we are dealing with. For SDLT purposes, Schedule 16 of FA 2003 sets out the provisions that relates to trust interests and the responsibilities of trustees. It defines two types of trusts for SDLT purposes – bare trusts and settlements.

Bare Trust
Generally, where a person acquires the residential property as bare trustee, SDLT applies as if the interest in the property is vested in the beneficiary of the trust (Sch 16, para. 3(1)) i.e. the beneficiary is treated as the purchaser.

This is not the case where there is a grant of a lease to the bare trustees. In these circumstances, the lease would be chargeable to SDLT as if the lessee was not a bare trustee i.e. the trustees are treated as the purchaser (Sch 16, para 3(3))

Settlements
For SDLT, Sch 16 para 1(1) defines a settlement as a trust that is not a bare trust. This will of course encapsulate the likes of interest in possession trusts (IIP) and discretionary trusts (DT). Where trustees of a settlement acquire a chargeable land interest, they are treated as acquiring the whole of the interest, including the beneficial interest for SDLT purposes.

Where the purchaser of the land transaction is deemed to be the trustee, the responsible trustee will have all the obligations of a purchaser for SDLT such as paying the tax and submitting the return.

Will the 3% SDLT surcharge apply to the transaction?
Separately, we need to look to Schedule 4ZA to determine if the SDLT 3% surcharge would apply to the acquisition by the trust.

Where the transaction falls within Sch 4ZA para. 10 (generally IIP trusts and bare trusts), the beneficiary is treated as the purchaser when considering if the 3% applies. If the beneficiary satisfies the conditions A-D as set out in Sch 4ZA para. 3, then the transaction will be a subject to the SDLT surcharge. A summary of the conditions can be found at SDLTM09765.

It is worth reminding ourselves that if any one of conditions A-D are not met then the transaction is not a higher rates transaction. For example, where the acquisition is a replacement of a main residence for the beneficiary, then condition D is not met and there would be no SDLT surcharge applicable.

Discretionary Trust
Trustees of a DT generally have discretion about how to use capital and income for the benefit of particular beneficiaries. For the purposes of the 3% SDLT surcharge, a residential property acquisition by a DT would be treated as a non-individual purchase. On a single dwelling acquisition, only conditions A and B in Sch 4ZA para.3 needs to be met.

The 3% will apply if the chargeable consideration is £40,000 or more and the purchased dwelling is not subject to a reversionary lease or if it is subject to such a lease, the unexpired term is less than 21 years.

The client in question had a DT. The trustees would be responsible for the SDLT on the land transaction and the reporting obligations as the deemed purchasers. It was also concluded that the client’s transaction would be subject to the 3% SDLT surcharge, it did not matter that this was in fact the first dwelling being acquired by the DT.

The above is a brief overview of a complex area of tax and advice should be sought with regards to specific client scenarios.

 


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Before joining the team, Vivienne had worked for small boutique tax firms which gave her exposure to a wide variety of tax. She dealt with tax issues mostly for owner-managed businesses and high net worth individuals. Vivienne is a member of the Association of Tax Technicians and is currently in the middle of studying to become a Chartered Tax Advisor.

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