Introduction to declarations of trust and stamp duty.

Where a bare trustee or a nominee acquires an interest in land (or an interest in a partnership), stamp duty land tax applies as if the interest had been acquired by the person for whom the bare trustee or nominee acts, except concerning the grant of a lease, where the bare trustee is treated as the purchaser of the whole of the interest acquired. [FA 2003, s 105 and Sch 16, paras (1) and (3). Where the trustee or trustees of any other type of trust acquire an interest in land (or an interest in a partnership) as trustees, they are treated for SDLT purposes as purchasers of the entire interest acquired, including the beneficial interest. [FA 2003, Sch 16, para 4].

For when trustees will be required to pay the 3% higher rates on the first and any subsequent acquisition of a dwelling, see below.

Can you buy a property from a trust?

Yes, you can, but you will be liable for stamp duty in the normal way according to how much you pay the trustees for the property.

Do you pay stamp duty on a trust?

A declaration of trust of land in favour of a purchaser may give rise to stamp duty land tax on the purchase price even if the legal title to the property is not altered. A declaration of trust and extra stamp duty can, therefore, arise unexpectedly.

What is a Declaration of Trust?

Under a declaration of trust, the property is declared to be held by the trustee or trustees subject to various obligations that govern how the trustees must deal with that property for the benefit of the trust’s beneficiaries. With joint ownership of land, there will be a trust of that land for the benefit of the joint owners so that they will hold the legal title on the trust for themselves as beneficial owners.

When and who should make a Declaration of Trust?

Trusts are very flexible devices and can be used in a very wide variety of situations where it is necessary or desirable to split the legal ownership and responsibility for owning property from the person or persons who are entitled to enjoy the economic benefits of that property. A typical example would be where trustees hold land for the benefit of children who have become entitled to the land on the death of a parent or relative.

Is there a stamp duty on investment trusts?

Yes, if you buy shares in an investment company, stamp duty is payable, but the fund managers will also have to pay stamp duty on the investments they buy for the fund to invest in.

Are Declarations of Trust legally binding in the UK?

Yes, a declaration of trust that has been validly created will be binding and enforceable by the courts, thereby protecting the interests of the beneficiaries in the trust property. There are certain exceptions when the courts may vary or cancel the declaration, such as in matrimonial proceedings.

What impact does a Declaration of Trust have on Stamp Duty Land Tax?

A declaration of trust over land that implements a sale or other dealing with the land for consideration will give rise to a liability to SDLT on the person receiving the benefit of the trust.

How is the stamp duty calculated in a trust?

SDLT will be computed in the normal way if there are any dealings with the land held in the trust for consideration. For example, the purchase of a life interest in possession, or an interest in an accumulation and maintenance trust or a reversionary interest in a trust formed under English law whose assets include land in the UK will be a land transaction for SDLT purposes.

Who pays the stamp duty in a trust?

Where a bare trustee or a nominee acquires an interest in land (or an interest in a partnership), SDLT applies as if the interest had been acquired by the person for whom the bare trustee or nominee acts, except about the grant of a lease, where the bare trustee is treated as the purchaser of the whole of the interest acquired.

Where the trustee or trustees of any other type of trust acquire an interest in land (or an interest in a partnership) as trustees, they are treated for SDLT purposes as purchasers of the entire interest acquired, including the beneficial interest and must pay the stamp duty.

Trustees and the 3% higher rates of stamp duty

The beneficiary of a settlement which, under the terms of the settlement, is entitled to occupy a dwelling for life or to income earned in respect of a dwelling will be treated as the purchaser of a dwelling acquired by the trustees for the additional charge. This displaces the normal SDLT rule, which treats the trustees of a settlement as the purchaser.

Where the trustees of a bare trust purchase a lease of a dwelling, the beneficiary of the bare trust is treated as the purchaser for the additional charge. This displaces the normal SDLT, which treats the trustees of a bare trust as the purchaser on the grant of a lease. [FA 2003, Sch 4ZA, para 10]. An existing dwelling owned by a settlement will be treated as owned by a beneficiary who is entitled to occupy the dwelling for life or to income earned in respect of the dwelling for the additional charge. The beneficiary of a bare trust which owns a dwelling is also treated as the owner of the dwelling, including where the interest in the dwelling is a lease. A disposal of the dwelling by the settlement or bare trust is treated as a disposal by the beneficiary for the additional charge.

The interests of a beneficiary under 18 years of age are attributed to its parents and any spouse or civil partner living with one of the child’s parents except to property held by trustees of children subject to arrangements made by the Court of Protection. [FA 2003, Sch 4ZA, para 12]. Individual trustees of a settlement who purchase a dwelling without beneficiaries entitled to occupy for life or to income from the dwelling will be treated as the purchaser. Still, they are treated as if they were not individuals. This means there is no exclusion for such trustees from the additional charge concerning a first or only dwelling acquisition, and the main residence exception is not available. [FA 2003, Sch 4ZA, para 13].

Therefore, there is no advantage in creating a series of settlements, each acquiring only one dwelling. It seems that if a beneficiary’s life interest may be determined by the trustees the trustees have the power to dispose of the dwelling without the beneficiary’s consent. The beneficiary will not be entitled to occupy the dwelling for life or the income from the dwelling for those purposes. Therefore, such a dwelling owned by the trust may not count as a dwelling purchased or owned by the beneficiary. Life interests in a discretionary trust are treated as interests in a bare trust.

Conclusion

In my experience, trusts are often misunderstood, and a careful analysis of the terms of the trust and the transaction being undertaken is key to being able to ascertain the correct tax consequences of the transaction.