Stamp it out

Stamp duty land tax (SDLT) is charged where an interest in land is acquired for consideration in England or Northern Ireland (the rules are different in Wales and are not considered here).

Trustees will often need to consider SDLT, for example, when purchasing land as a trust investment or residence for one or more beneficiaries, or when transferring land to beneficiaries. There can be nasty traps for the unwary, which I aim to explain in this article, and offer solutions to avoid them.

The SDLT provisions affecting trustees are contained mainly in section 105 of, and schedule 16 to, the Finance Act 2003 (FA 2003). However, schedule 4ZA, which deals with the circumstances in which the higher rates of tax are payable on additional dwellings, is also relevant.

Beneficiaries may encounter problems in relation to the higher rate of SDLT and loss of first-time buyers’ relief.

SDLT on creation of trusts

A transfer of land to trustees will not attract SDLT if, as is usually the case, there is no consideration. However, the assumption of secured debt by the trustees will constitute consideration under schedule 4(8)(1) to the FA 2003 and, even if below the starting threshold for payment of SDLT, will require submission of form SDLT1, followed by Revenue Certificate SDLT5 (unless the total consideration is less than £40,000).

Although for SDLT purposes, there is no express rule that the trustees are to be treated as a single person distinct from the persons who are the trustees, from time to time (as there is for capital gains tax (CGT)), HM Revenue & Customs (HMRC) in practice accepts this: see Stamp Duty Land Tax Manual (SDLTM) 31745:

“Application: Trusts and powers: Changes in the composition of trustees of a continuing settlement

“For stamp duty land tax purposes we treat trustees of a settlement as a single and continuing body of persons, as we do for capital gains tax.

“It follows that for a continuing settlement a change in the composition of trustees is not a land transaction.”

Similarly, when it comes to the higher rate of SDLT payable on additional dwellings (see below), a purchase as a trustee is entirely separate from a purchase by trustees in their personal capacity.

Rates of SDLT payable by trustees

The rates of SDLT on commercial property (shops, offices, mixed commercial and residential properties) are the same for trustees as for any other purchaser. The rates are as follows:

	SDLT rate
Up to £150,000	Zero
The next £100,000 (the portion from £150,001 to £250,000)	2%
The remaining amount (the portion above £250,000)	5%

The position is more complicated where residential land is purchased.

Rates on purchases of residential land are higher than on commercial property, reaching 12% on consideration in excess of £1.5 million. In addition, with effect from 1 April 2016, a new regime for SDLT on additional properties (3% above the normal rates) was introduced (see schedule 4ZA to the FA 2003).

As explained below, individuals pay at the higher rate, if, broadly speaking, they already own a major interest in a residential property and the purchase is not replacing a main residence.

The general rule is that a purchase by trustees on behalf of a trust is liable to the higher rates, irrespective of whether it is a first or additional purchase. However, there are situations where, for the purposes of the higher rates, the beneficiary is regarded as the purchaser.

When do trusts pay the 3% higher rates for additional dwellings?

The Finance Act 2016 inserted a new schedule 4ZA into the FA 2003. A charge of 3% above the normal rate is payable on the purchase of a major interest in an additional dwelling.

For the purposes of the higher rates, a “major interest” does not include a leasehold interest if the lease was originally granted for a period of seven years or less (paragraph 2(4)).

For the purposes of the higher rates, a “dwelling” is defined (at paragraph 18) as a building or part of a building that is “used or suitable for use as a single dwelling, or in the process of being constructed or adapted for use as a dwelling”. The question is whether a building is suitable for use as a dwelling on the day of completion, not whether it has been so used in the past: see PN Bewley Ltd v RCC [2019] UKFTT 65 (TC).

The gardens and grounds of the dwelling or land that are to be enjoyed with the dwelling (including buildings, such as a detached garage), are taken to be part of the dwelling, but a transaction in such a building or land without the purchase of the actual dwelling will not be liable to the higher rates (see SDLTM 09740).

Conditions for higher rates

These vary depending on whether the purchase is by an individual or non-individual (a company or trustee).

Individuals

The higher rates will apply to the purchase of a major interest in a single dwelling by an individual, if, at the end of the day of purchase, conditions A to D are met (schedule 4ZA(3)(1) to the FA 2003):

• condition A: the chargeable consideration is £40,000 or more
• condition B: the major interest purchased is not subject to a lease which has more than 21 years to run on the date of purchase – so a purchase of a freehold subject to a lease with 80 years left would not be caught
• condition C: the purchaser owns a major interest in another dwelling which has a market value of £40,000 or more and is not subject to a lease which has more than 21 years to run at the date of purchase of the new dwelling
• condition D: the dwelling being purchased is not replacing the purchaser’s only or main residence.

Non-individuals

The higher rates will apply to the purchase of a major interest in a single dwelling by a purchaser who is not an individual, if, at the end of the day of purchase, conditions A and B are met (schedule 4ZA(4) to the FA 2003).

At first sight, it would appear as though trustees who fulfil conditions A and B always pay the higher rates and that the position of the beneficiaries is irrelevant. However, this is not the case.

Schedule 4ZA(10)(1) contains specific provisions dealing with settlements and bare trusts. It provides that the beneficiary (rather than the trustees) is to be treated for the purposes of the schedule as the purchaser if the settlement is a bare trust, or:

“(c) if under the terms of the settlement a beneficiary will be entitled to:

(i) occupy the dwelling or dwellings for life, or

(ii) income earned in respect of the dwelling or dwellings.”

A bare trust is defined (in schedule 16(1)(2) to the FA 2003) as a: “… trust under which property is held by a person as trustee: (a) for a person who is absolutely entitled as against the trustee, or who would be so entitled but for being a minor or other person under a disability, or (b) for two or more persons who are or would be jointly so entitled.”

That definition is obviously based on the CGT provisions in section 60 of the Taxation of Chargeable Gains Act 1992.

In the case of a bare trust, the position of the beneficiary always determines whether the higher rates apply. The position of the trustees is irrelevant.  

In the case of purchases by trustees of other settlements, the beneficiary is treated as the purchaser for the purpose of the higher rates, if the beneficiary is “entitled” to occupy the dwelling for life or to enjoy the income from it.

Note that the entitlement of the beneficiary does not have to be a qualifying interest in possession for inheritance tax purposes, and that there is an odd distinction between the right to occupy a dwelling, which must be “for life”, and the right to income, which does not: a revocable or short-term right to income is sufficient. It is unclear whether, if a life tenant has a revocable life interest in a dwelling, or if trustees have power to sell it without the life tenant’s consent, the life tenant can be said to be entitled to occupy it for life.

A higher rates problem for beneficiaries

As explained above, a beneficiary with a right to receive income is treated for the purposes of the higher rates as the purchaser of the dwelling, even if their right is revocable or short term. This creates a danger where such a beneficiary intends to purchase a property of their own.

A beneficiary with a right to income will have to pay the higher rates, even though they are purchasing their first dwelling.

The solution is for the trustees to plan ahead. Normally, they will have sufficient powers under the trust instrument to revocably terminate the right to income before the purchase is completed. It is the position on the day of completion which determines whether the higher rates are payable.

There is the potential for negligence claims against solicitors for not advising on the potential higher rate charge.

Higher rates problems for trustees as individuals

The trustees are registered on the Land Register as purchasers of land. HMRC routinely checks the register for apparent additional dwellings where the higher rates have not been paid and will send out enquiry letters. Most people become anxious when faced with unexpected communications from HMRC.

It is, therefore, helpful to warn trustees that this may happen and to suggest what information they will need to give to HMRC, for example, “we are the trustees of the XYZ trust and bought this property on behalf of the trust”. Depending on the facts, HMRC may be concerned with whether the trustees bought the property in a personal capacity or whether the trust has paid at the appropriate rate.

For example, if the higher rates are not payable on the trust purchase because there was an entitled beneficiary who did not own a major interest in another dwelling, the trustees would need to explain that to HMRC.

Can anything be done at HM Land Registry to head off HMRC enquiries?

The answer, sadly, is very little.

HM Land Registry will automatically enter a form A restriction preventing a disposition by a sole proprietor whenever it registers two or more persons as proprietors of a registered estate in land (unless it is told that the purchasers are beneficial joint tenants, or they are registered as personal representatives).

However, such a restriction does not tell HMRC whether the purchase is as trustees or as co-owners, so it will not head off enquiries as to whether the registered owner should be paying the higher rates. Even when HMRC is satisfied that the purchase was as trustees, there will still remain the issue of whether the purchase was liable to the higher rates which, as explained above, depends on whether the purchase was on behalf of a bare trust, or whether a beneficiary is entitled to occupy the dwelling for life or enjoy the income from it.

The trust instrument may limit the powers of trustees, for example, by requiring the consent of named beneficiaries to sales, leases or mortgages of land. The trustees must then apply for a form B restriction as well as the form A restriction. The wording of a form B restriction is as follows (see schedule 4 to the Land Registration Rules 2003):

“No disposition [or specify details] by the proprietors of the registered estate is to be registered unless one or more of them makes a statutory declaration or statement of truth, or their conveyancer gives a certificate, that the disposition [or specify details] is in accordance with [specify the disposition creating the trust] or some variation thereof referred to in the declaration, statement or certificate.”

A form B restriction will alert HMRC to the fact that the purchase is on behalf of a trust. However, it does not head off enquiries as to whether the trustees are liable to pay the higher rates. Note that the restriction can, in any event, only be entered where the trust instrument requires consent to the transaction.

Appropriations and appointments of land from a settlement

SDLT will be payable if a beneficiary gives consideration (see SDLTM 31720). However, it is rare, though not unknown, for a beneficiary to give consideration to trustees in return for an appointment or appropriation of land.

A beneficiary may agree to assume responsibility for a mortgage charged on land, in which case, SDLT becomes payable on the value of the liability.

First-time buyers’ relief

This is currently suspended, so I will deal with it lightly. The relief significantly reduces the tax payable on purchases by first-time buyers not exceeding £500,000. A first-time buyer is an individual who has never acquired a major interest in a dwelling (see schedule 6ZA(6) to the FA 2003). It is, therefore, not available to trustees, as they are not buying as individuals, nor to anyone who has ever had such an interest in a major dwelling irrespective of whether they purchased the dwelling. Having had an interest, even briefly, as a result of an inheritance or lifetime gift disqualifies an individual from relief. Usefully, a person who varies or disclaims an entitlement to land while they still have only a chose in action, has never been entitled to a major interest in a dwelling, so can qualify as a first-time buyer.

Beware of schedule 6ZA(1)(7) to the FA 2003, which provides that relief is not available if the transaction is liable to the higher rates. This can catch out trust beneficiaries.

Conclusion

SDLT is payable in relation to trusts in three scenarios.

1. On creation, if the trustees assume responsibility for a liability charged on land.
2. If the trustees purchase non- residential land, in which case, they pay at standard rates.
3. If the trustees purchase residential land, in which case, they pay at the higher rates, unless the trust is a bare trust, or a beneficiary is entitled to occupy for life or to the income from the dwelling. In either respect, the circumstances of the beneficiary govern liability to the higher rates.

Trustees should also consider SDLT when a beneficiary with an entitlement to income from a dwelling is proposing to buy a residence. The beneficiaries need to know that they should inform the trustees of any plans to purchase property, so advisers need to make this clear to trustee clients.

Advisers should also warn trustees to expect enquiries from HMRC.