Trusts And The 3% Stamp Duty Land Tax Charge

Malcolm Finney takes a look at the complexities of trustee residential property purchases from a stamp duty land tax perspective.

The 3% stamp duty land tax (SDLT) charge applies to residential dwellings purchased on or after 1 April 2016. In principle, it applies where at the time of purchasing a residential dwelling (typically a second home or buy-to-let) the purchaser is an individual who already owns another such dwelling (typically his/her own home).

However, where trustees are involved in a purchase transaction it becomes necessary to ascertain not only whether it is the trustees of the trust or the beneficiaries under the trust who are the purchasers but also who, following the purchase, is regarded as the owner of the purchased property. Until both issues are resolved, the impact of the 3% SDLT charge cannot be ascertained.

Two typical examples of trust involvement are as follows. 

(a) Mr Smith settles monies on a discretionary trust to enable the trustees to purchase a property for the benefit of his four children. 

(b) Mr and Mrs Bloggins would like to buy a dwelling for their only son, Brian, who is aged 18, for him to live in whilst he attends university; they purchase the property in their own names and hold the property on a bare trust for Brian.

In both examples, the legal ownership of the dwelling/home resides with the trustees of the trust, but beneficial ownership resides with the beneficiaries; in other words, the same person does not own both the legal and beneficial interests, as would be the situation under a normal individual purchase.

This split of ownership begs the question: how does SDLT apply in such circumstances for the purpose of the 3% SDLT charge?

For SDLT (and indeed general tax purposes) purposes the legislation distinguishes so-called settlements (basically, a substantive trust such as Mr Smith’s discretionary trust) from a bare trust (such as Mr and Mrs Bloggins’ trust).

A bare trust is simply one where the beneficiary under the trust has an absolute right to the trust property and the bare trustees merely hold the legal title with no beneficial interest.

A settlement (or substantive trust) is any trust which is not a bare trust; typically, a settlement involves the trustees having to carry out duties under the trust including making decisions in the interests of the beneficiaries about the trust property/income; under such a trust the beneficiaries do not have an absolute right to the trust property (as is the case for the bare trust). 

Where the purchasers of the property are trustees of a bare trust or trustees of a settlement it is the beneficiary(ies) (not the trustees) who is/are treated as the purchaser. This assumes that the beneficiary of the bare trust is age 18 or over and with respect to the settlement only if under its terms one or more beneficiaries have the right to occupy the trust property for life or have the right to income generated by the property. Otherwise (e.g. if a discretionary settlement/trust) it is the trustees of the settlement who are treated as the purchasers.

It is the beneficiaries in such cases who are also treated as owning the property except in the case of the discretionary trust, where the trustees are the owners.

 

Thus, if Brian in example (b) at age 25 purchases, say, a buy-to-let he will then own two properties as he is also treated as owning the property his parents purchased for him which is held in a bare trust; the 3% charge will then apply to his own purchase.

On the other hand, if one of the discretionary beneficiaries of Mr Smith’s discretionary trust in example (a) purchased a buy-to-let property the 3% charge would not apply to that purchase as that beneficiary is not treated as owner of the property held in the discretionary trust. But should the trustees, not a beneficiary, purchase another property (i.e. a second property) the 3% charge will apply.

Suppose that Mr and Mrs Bloggins’ friends, Mr and Mrs Giles, having spoken to Mr and Mrs Bloggins and have also decided to purchase a property for their son, Peter, to live in whilst at university. Peter is age 16 when his parents purchase the property and hold it on a bare trust for him. 

Unfortunately, as Peter is not aged 18 his parents (not Peter) are treated as the purchasers (and owners) of the property and as they already own their own home the 3% charge will apply to their purchase for Peter (which would not be the position for Mr and Mrs Bloggins).

The type of trust involved in a residential property purchase will dictate whether an exposure to the 3% charge will arise, and for SDLT purposes it is not always as obvious as it may seem. For example, where a trust beneficiary has a right to reside in trust property for life, despite not actually owning the property the beneficiary is treated as owning the property and would thus be exposed to the 3% charge should (for example) that beneficiary personally purchase another property.