How does Stamp Duty Land Tax affect the purchase of residential property for trusts?

A common question which arises when considering the purchase of properties where trusts are involved relates to Stamp Duty Land Tax (SDLT), following the introduction in 2016 of the additional 3% SDLT charge above the standard rates for purchases of "additional residential properties".

Trusts are commonly created either during someone's lifetime or through their will in order to protect family wealth. In order to ascertain whether the higher rates will apply to residential property held within the trust, it is necessary to consider the nature of the trust and the beneficiaries' interests.

What is a Bare Trust?

Beneficiaries of a bare trust have a right to all of the capital and income at any time provided they are over the age of 18.

Any residential property purchased by the trustees will be treated as if the beneficiary had purchased it for SDLT purposes. It is therefore necessary to consider the circumstances of the beneficiary when ascertaining if the 3% surcharge would apply.

Provided the beneficiary does not own another residential property anywhere in the world, or is otherwise replacing his main residence, the surcharge will not apply. If however the beneficiary is under 18, the child's parents are treated as purchasing the property for the purposes of the higher SDLT rates.

Life Interest or Interest in Possession

Beneficiaries have a right to live in the property or receive the income (less any expenses) from the property as it arises.  A life interest trust is commonly used in wills so that the surviving spouse/partner can continue to live in the property but the deceased spouse/partner's share is owned by the trustees rather than passing outright to the surviving spouse. The question in relation to SDLT therefore typically arises when a surviving spouse/partner is looking to downsize.

For the purposes of SDLT, the beneficiary with a life interest, or interest in possession, will be treated as owning the property. Provided the new property replaces the life tenant's main residence, the higher SDLT rate will not apply even if the trust owns other residential property.  If the trust owns a residential property and the trustees or the beneficiaries purchase another residential property and are not replacing the main residence, they will be liable to the higher rates.

What is a Discretionary Trust?

Under a discretionary trust, the trustees make decisions in relation to the distribution of income and capital (usually guided by a letter of wishes). As the trustees can choose who benefits from the trust, and how much a beneficiary should receive, no beneficiary has an automatic right to anything from the trust.

In this situation, the higher rates of SDLT will apply to all purchases (including the first purchase) of residential property by the trustees (where the consideration is £40,000 or more and the property is not subject to a lease with an unexpired term of more than 21 years) as the beneficiaries' interest is considered to be too remote. Depending on the structure and terms of the trust, it may be possible for the trustees to consider their options before proceeding with the purchase.

If a beneficiary is looking to purchase a property for themselves, rather than the trustees, whether the surcharge will apply will depend on the beneficiary's own circumstances.  

In summary

Trustees should seek advice on this when buying residential property, particularly as they are liable for submitting the land transaction return and paying the SDLT, and trust beneficiaries must take into account the nature of their interest when looking to buy a property themselves. Please contact us if you would like to discuss this further.

For more information please contact Charlotte Coombs, Solicitor in the Tax, Trust and Succession team, on Charlotte.Coombs@michelmores.com or +44 (0)1392 687779.