Stuck on Stamp Duty Land Tax (SDLT) on a property in a trust? Not to worry, this guide will break down how Stamp Duty Land Tax and trusts affect different types of trusts and give you the lowdown on how to keep your tax liabilities in check.

Key Takeaways

• It’s really important to get your head around how trusts interact with Stamp Duty Land Tax (SDLT), especially since different types of trust have their own unique SDLT implications that can make a big difference to your tax bill.
• Trust structures, like bare trusts, discretionary trusts, and life interest trusts, all have their own SDLT rules and if you don’t get the hang of these you could be leaving a big financial headache for yourself.
• If you’re a trust buying up additional properties, especially if it’s a discretionary or bare trust, you could be facing higher rates of SDLT – which is why getting it right when it comes to SDLT returns and planning is crucial.

Working Out Trusts and Stamp Duty Land Tax

Trusts are basically a way of setting up a legal arrangement where you transfer assets to people (the Trustees), who then manage them on behalf of the people who are supposed to benefit from them (the Beneficiaries). It’s often used for estate planning or to keep assets safe. But, as soon as you start dealing with property, Stamp Duty Land Tax becomes a major consideration. SDLT is the tax on the price you pay for a property in the UK, so getting to grips with how it works is essential if you’re handling trusts.

There are three main types of trust – bare trusts, discretionary trusts and life interest trusts. Each one has its own characteristics and its own rules for SDLT. For example, if you’ve got a discretionary trust, the Trustees get to decide who gets what – the Beneficiaries don’t have any say in the matter. Which means they don’t have any rights to the income or the capital. This complexity can lead to tax bills you weren’t counting on, which is why you should get some proper professional advice if you’re dealing with trusts and SDLT.

Trusts and SDLT together create a right old mess of rules and regulations. The number of possible tax liabilities is endless and that makes it really important to understand how they work together. Whether you’re setting up a trust or moving a property into one, this guide can help you avoid the common pitfalls and get a handle on how it all works.

Trusts, SDLT and the Different Types

Trusts come in all shapes and sizes, each one with its own set of rules to follow when it comes to SDLT. The type of trust you have will decide how SDLT works for you. We’re going to take a closer look at the three main types – bare trusts, discretionary trusts, and life interest trusts – to see what their SDLT implications are.

Bare Trusts

Bare trusts are often called simple trusts and the key thing is that the Beneficiary has complete control of the property and they’re entitled to the capital and income from day one. As long as they’re over 18, that is. When a Bare Trust acquires land, it’s treated as if the Beneficiary bought it themselves. Which can be a good thing in some ways – but it also means the Beneficiary’s financial situation can really impact the tax bill.

In practice, when a Trustee buys a property and it’s held in a Bare Trust, the cost of the SDLT is treated as if the Beneficiary bought it themselves. Which has a few consequences that you should know about:

• It might work out alright in some cases – but it depends on the Beneficiary’s financial situation.
• It might result in higher SDLT rates if the Beneficiary already owns a property.
• It might also mean higher SDLT rates if the Beneficiary isn’t replacing their main home.

Take a young person who inherits a property through a Bare Trust when they’re old enough – they might get a nasty tax bill if they already own a home because of the Finance Act.

Bare trusts are often used by parents to hold a property for their kids until they come of age. However, the 3% SDLT surcharge could apply if the Beneficiary already owns another residential property. So while Bare Trusts can keep things simple, you do need to think seriously about the SDLT implications.

Discretionary Trusts

Discretionary trusts give the Trustees the right to decide which Beneficiaries get what, and how much – the Beneficiaries don’t have any automatic rights to the income or the capital at all. Which means it’s down to the Trustees to decide how to distribute it. For SDLT purposes, the trust itself is the one buying the property – not the Beneficiaries.

With discretionary trusts, the Beneficiaries have their interests looked at as being too remote when buying a property. As a result, when a discretionary trust buys a residential property, it’s hit with higher SDLT rates for anything over £40,000 with no lease longer than 21 years. Which can really affect the cost of buying a property.

Discretionary trusts are often used for estate planning and for keeping assets safe – they’re very flexible and can be really good for managing and distributing assets. But with all that flexibility comes the SDLT challenges. Trustees need to get their heads around these implications to avoid tax liabilities and make sure the trust achieves what it’s set out to do.

Life Interest Trust

what they are and how they work. They grant a person the right to use or benefit from a property for the rest of their life. The person with that right, the life tenant, can either live in the property or get the income from it. And when it comes to SDLT, the life tenant’s circumstances play a big part in how much tax is involved.

For SDLT purposes:

• Beneficiaries with a life interest in a property are treated as its owners.
• When the property is sold or handed over to someone else, the fact that it’s a life interest trust makes a difference in how SDLT is calculated.
• And, if the property being sold is the life tenant’s main home, you don’t have to pay the higher SDLT rate if you’re buying a new home.

This makes life interest trusts a bit of a strategic choice in some estate planning situations. But you do need to understand the SDLT implications. The right to use the property or to get income from it can change how SDLT is worked out, which in turn can affect the whole financial picture for the trust.

Higher Rates of SDLT on Trust Property

Trusts – whether they’re discretionary, bare trusts or anything else – can get a 5% SDLT surcharge when they buy extra residential properties worth £40,000 or more. This can make a big difference in the overall finances of a trust.

For bare trusts:

• If the person getting the benefit of the trust already owns other residential properties, they’ll get hit with a 3% surcharge when buying more property.
• The SDLT implications don’t just stop at the trust – the people benefiting from the trust will be treated as owning a significant interest in the property, too.
• Even if the trust is set up to benefit minors, the parents will be treated as the owners of any properties held in the trust.
• This can trigger that extra charge dwelling surcharge.

There are some situations where you won’t have to pay higher SDLT rates, though:

• If you’re replacing your main home, higher rates might not apply.
• However, if any of the buyers in the trust arrangement are hit with higher SDLT rates, the whole transaction will have to pay those higher rates.
• So you do need to think about all the parties involved – including spouses – when working out SDLT liabilities.

SDLT Reliefs for Trust Property

There are some SDLT reliefs that can make a big difference for trust property transactions. One of the main ones is Multiple Dwellings Relief, which lets you reduce the SDLT when buying multiple residential properties, provided you meet certain conditions.

To get MDR, you divide the total amount you paid for the properties by the number of extra properties you bought, and then work out your tax based on that average price.

Then there’s First-Time Buyers’ Relief, which can apply to trust property if the buyer is going to live in the property and the price doesn’t exceed a certain threshold. Trustees need to include the right relief codes in the SDLT return if they want to get the relief.

SDLT Returns and Payments for Trusts

When it comes to SDLT returns and payments, trustees need to be on top of their game. Key points to keep in mind are:

• Trustees have to send in their SDLT return within 14 days of the transaction taking place.
• Payments can be made once the return has been submitted.
• Returns and payments can be sent electronically or on paper, but accuracy is crucial to avoid any problems.
• Trustees acting on behalf of minors or people who can’t look after themselves may have a bit more flexibility when it comes to signing the SDLT return.

Also, trustees need to make sure they include all the properties involved in the transaction and get all the details right for each one.

Purchasing Property from a Trust

When buying property from a trust, the standard SDLT rules apply to the amount you pay to the trustees. Trustees are treated as buyers for SDLT purposes, and that includes both the legal and beneficial interests they’re acquiring. In discretionary trusts, buying property is treated as a corporate transaction, which can affect SDLT treatment.

In some cases, buying through a bare trust can make it look like the beneficiary is the buyer for SDLT purposes, which can simplify things. But it also means that the beneficiary’s existing property ownership will affect their SDLT liabilities.

Life tenants in life interest trusts can live in the property or get income from it during their lifetime, which can affect how SDLT is worked out. It’s really important to understand these nuances if you’re involved in property transactions with trusts.

Declarations of Trust and SDLT

Whether you’re a trustee, a beneficiary or a prospective buyer, having an idea of how SDLT applies can help you make informed decisions and avoid any unexpected tax bills.Declarations Of Trust & Their Impact On SDLT

Declarations of trust can have a big impact on SDLT even if the ownership of the property stays the same. Using a deed to put a property in trust can sometimes trigger new tax obligations if the trust ends up selling the property or benefiting from it in other ways. It’s worth noting that SDLT can also be triggered in these situations, even if the property title doesn’t actually change hands.

In cases where two or more people own a property together, the way it’s set up in a trust will affect whether the SDLT will be charged when one of the owners is transferring their share of the property to the other. Understanding what can happen with SDLT in this situation is super important to avoid any potential penalties and make sure you’re sticking to the rules, or risk being held liable if you don’t get it right.

SDLT Refunds for Trust Property

Occasionally, it’s possible to get a refund of SDLT paid on a property held in a trust. However, this is really only going to happen in exceptional circumstances. For instance, if someone bought a new home since the start of 2017 but they still can’t sell their old property after 3 years because of something out of their control, they may be able to get some of their SDLT back. If the old property was sold before the end of October 2018, the clock is ticking on when they can apply for a refund.

To get the refund, they’ll need to sell the old property and sort out all the paperwork required to claim the refund. This all needs to happen within the timeframe after they’ve finally sold their old home. It’s a pretty detailed process that requires a clear understanding of the rules to avoid missing the deadline.

SDLT for Non-UK Resident Trusts

SDLT can be a real challenge for non-UK resident trusts; here are a few things to keep in mind:

• Since April 2021, there’s been a 2% surcharge on residential property purchases by people who aren’t based in the UK.
• This surcharge applies to both freehold and leasehold property sales on the condition that at least one of the buyers is a non-UK resident.
• It’s worth noting that trusts are considered non-UK residents for SDLT purposes if any of the trustees are classed as non-UK residents. For bare trusts, the SDLT rules are a bit different – it’s the beneficiaries who determine whether the surcharge applies or not. If the buyer becomes a UK resident within a certain timeframe after the purchase, they can even get a refund on the 2% surcharge.

Summary

Dealing with SDLT and trust arrangements can be a minefield. From understanding the different types of trusts and how they affect SDLT to managing higher rates and figuring out reliefs and returns, this guide has covered a pretty comprehensive range of topics.

Whether you’re dealing with bare trusts, discretionary trusts or life interest trusts, having a solid understanding of how SDLT works will be a big help in avoiding unexpected tax bills. By staying on top of the rules and seeking advice when you need it, you can make sure your trust arrangements are in line with SDLT regulations, protecting your financial interests.

Frequently Asked Questions

Are trusts subject to stamp duty?

Yes, trusts are subject to stamp duty, and if you purchase property from a trust, you will be liable for stamp duty based on the amount paid to the trustees.

What is a bare trust and how does it impact SDLT?

A bare trust is a straightforward arrangement where the beneficiary holds an absolute right to the assets. In terms of SDLT, this means the beneficiary is considered the purchaser, potentially affecting their tax liabilities according to their personal financial circumstances.

How are discretionary trusts treated for SDLT purposes?

Discretionary trusts are treated as the purchaser for SDLT purposes, which means that higher SDLT rates may apply if the trust acquires residential property valued over £40,000. Therefore, it is important for trustees to be aware of these potential additional costs when managing property transactions.

What SDLT reliefs are available for trust property?

Trust properties may qualify for Multiple Dwellings Relief (MDR) and First-Time Buyers’ Relief if specific conditions are met, and it is essential to include the correct relief codes in the SDLT return to claim these benefits.

Are there higher SDLT rates for non-UK resident trusts?

Yes, non-UK resident trusts are subject to a 2% surcharge on residential property purchases due to higher SDLT rates applicable to non-UK residents. This includes any trust where at least one trustee is non-UK resident.