SDLT: Some Difficulties with Land for Trustees
20 February 2018

In the current political and economic climate, trustees have a lot to think about. Despite the slowdown in the property market, land remains a popular long term investment and trustees continue to acquire properties for use by beneficiaries.
Introduction
There have been many changes to the taxation of property in recent years as part of the government’s policy of discouraging second homes and buy-to-lets for both domestic and overseas purchasers.
This article focuses on the Stamp Duty Land Tax (“SDLT”) situation and the points for trustees to watch.
The rates of SDLT depend on the nature of the property purchased and how many properties are owned.
Statutory references below are to Schedule 4ZA Finance Act 2003 unless otherwise stated.
The basics
With effect from 4 December 2014, the “slab” basis of charging SDLT was changed to the “slice” basis. Under the old system, there was a “cliff edge” at each rate band threshold – if the price went £1 over the threshold the higher rate was charged on the whole purchase price. Under the current system, tax is charged on each “slice” of value with rates increasing as the value increases up to a maximum of 12%.
With effect from 1 April 2016, a new regime for higher rates of SDLT was introduced (Schedule 4ZA Finance Act 2003).
An individual will be subject to the higher rates if he already owns a residential property on the day when he acquires one or more additional properties.
The higher rates of SDLT apply where the consideration for the purchase is more than £40,000 and the property is not subject to a lease for 21 years or more.
The new higher rates for residential property do not apply to an individual if the second property is replacing the purchaser’s main residence.
A company that purchases a residential property (and is not within ATED) is subject to the higher rates automatically, even on a first property, to prevent an obvious avoidance route (paragraph 4). A company that buys a property that is within ATED is subject to a 15% SDLT rate under Schedule 4A Finance Act 2003, irrespective of value (though it must be over the ATED threshold of £500,000). The automatic 15% does not apply to a company acting as a trustee (but the higher rates can apply).
In the November budget, the government announced that first-time buyers would have a special nil rate slice of £300,000. In the case of first-time buyers buying more expensive properties, the first £300,000 would be subject to SDLT at a nil rate with the balance, up to £500,000, being charged at 5%. The new relief does not apply if the value of the property is more than £500,000. The new rules apply to purchases completed on or after 22 November 2017.
Subject to the new first-time buyer relief, the rates of SDLT on residential property are set out below:
Property or lease premium or transfer value | SDLT rate normal rate |
SDLT rate for additional properties |
Up to £125,000 | Zero | 3% |
The next £125,000 (the portion from £125,001 to £250,000) | 2% | 5% |
The next £675,000 (the portion from £250,001 to £925,000) | 5% | 8% |
The next £575,000 (the portion from £925,000 to £1.5m) | 10% | 13% |
The remaining amount (the portion above £1.5m) | 12% | 15% |
So the maximum rate for a first property is 12%. The rates for second and additional properties are 3% higher at each “slice” with a maximum rate of 15%.
A different set of rates apply for non-residential property and the rates remain the same irrespective of the number of commercial properties owned.
The non-residential rates apply to commercial property such as shops or offices, land without buildings eg forests or farms and mixed use properties, for example, a shop with a flat above or a doctor’s surgery attached to a house.
The commercial rates also apply where six or more residential properties are bought in a single transaction.
I consider multiple purchases further below.
The rates of SDLT for non-residential property are set out in the table below:
Property or lease premium or transfer value | 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% |
A further point to watch is “linked transactions”. This is an anti-avoidance provision designed to prevent fragmentation of interests in property to achieve lower rates. So, where transactions are linked, the consideration for all the transactions is aggregated and SDLT calculated on the total value then apportioned between the different transactions. It does not matter whether the different interests are acquired by the same person or by different but connected people, but the transactions must be part of the same scheme or arrangement.
If, as part of a pre-arranged plan, trustees bought a leasehold interest and, as a separate transaction, purchased the freehold, the total purchase price of both interests would be added together and SDLT charged on the total, ie the trustees would not get the benefit of two nil rate slices and the lower rates of SDLT. On the other hand, if the trustees purchased a long leasehold interest and some years later obtained the opportunity to buy the freehold and did so, the linked transactions rules should not apply as these would be genuinely separate transactions.
The above rules are not, of course, specific to trustees but trustees need to be aware of them.
What is a “dwelling”?
The residential rates of SDLT apply to “dwellings”. So what is a “dwelling”?
Paragraph 18 of Schedule 4ZA Finance Act 2003 defines a dwelling as a building or part of a building which “is used or suitable for use as a single dwelling or is in the process of being constructed or adapted for such use”.
The garden or other land that is intended to be used with the building including other buildings such as a detached garage are considered to be part of the dwelling.
Certain purpose built student accommodation is not regarded as a dwelling for this purpose.
How do these rules apply to trustees?
The rules for SDLT on commercial property apply to trustees in the same way as they apply to any other purchaser.
The particular complexity in relation to SDLT arises on residential property. Here, the tax rate depends on the nature of the trust.
Bare Trusts
A trustee is trustee of a bare trust if the beneficiary is “absolutely entitled to the property as against the trustees”. This follows the capital gains tax definition so also applies where a beneficiary would be absolutely entitled as against the trustees but for disability or age (paragraph 1(2) Schedule 16 Finance Act 2003). By paragraph 3 of Schedule 16, the acts of the trustee are treated as the acts of the beneficial owner.
So if a trustee buys a residential property to hold on a bare trust whether for a minor or anyone else, the rate of SDLT has to be determined by reference to the status of the beneficiary.
Example 1
Trustees are holding a house as nominee for Amelia and that is her main residence. If Amelia acquires a second property in her own name, she will pay the higher rates of SDLT on that. If the trustees sell Amelia’s house and buy a further property for her to occupy as her main residence, the normal rates will apply.
Life interest trusts
Under paragraph 10 of Schedule 4ZA, where the purchaser is the trustee or trustees of a settlement and under the terms of the settlement a beneficiary is entitled to:
- occupy the dwelling for life, or
- income earned in respect of the dwelling,
the beneficiary will be treated as the purchaser and not the trustees. Paragraph 11 of the Schedule includes similar provisions in relation to the sale or other disposal of the trust property.
In this case, as with a bare trust, the rate of SDLT has to be determined by reference to the circumstances of the beneficiary. It is also important to note that the beneficiary’s life interest must exist by virtue of the terms of the settlement itself and it is not sufficient if the trustees merely exercise a discretion to allow the beneficiary to occupy.
The life interest does not have to be a “qualifying life interest in possession” for inheritance tax purposes. It is only necessary that the beneficiary is entitled either to occupy the property or to receive the income from it so that these provisions are relevant to post-2006 trusts as well as older settlements.
Example 2
Brian is the life tenant of a one quarter share of the Zebra Settlement and he owns his main residence jointly with his wife. The trustees have never held a property in the settlement but now buy Brian a holiday home. The trustees will pay the higher rates of SDLT as Brian will be treated as the purchaser and he already owns a residential property. This would also be the case if the trustees bought an investment property to produce an income for Brian.
Example 3
Brian has a sister Celia and brothers Dan and Eddie and each of them has a life interest in one quarter of the trust fund of the Zebra Settlement.
Celia does not own any other residential property and she requests the trustees to use her share of the trust fund to buy her a home. Dan has no other residential property and he requests the trustees to use his share of the trust fund to acquire a buy to let flat. Eddie already has a buy to let property and requests the trustees to use to use his share of the trust fund to buy a main residence for him.
In each case, the purchaser is treated as being the beneficiary and not the trustees.
The fact that the trustees already own a property – Brian’s holiday home – does not affect the way in which Celia’s, Dan’s and Eddie’s shares of the trust fund are treated: the share of each beneficiary is looked at separately.
The purchase for Celia is her first property. The trustees will pay the normal, lower, rates of SDLT on Celia’s house.
The purchase for Dan is also a first property. It does not matter whether the first property is an investment or a home, the trustees will pay the lower rates of SDLT.
Eddie already has an investment property. Even though the trustees are buying a property which will be his main home, this will be his second property and the trustees will pay the higher rates of SDLT. If the trustees subsequently sold Eddie’s house and bought a new property which was to be a replacement for his main residence, the lower rates would apply.
Other trusts
The trustees of a trust which is neither a bare trust nor a life interest trust (as defined above) will always pay SDLT at the higher rates, irrespective of whether the property is for occupation or investment and irrespective of whether it is a beneficiary’s main residence. The trustees are treated as the purchaser (or seller, as appropriate) (paragraph 13 Schedule 4ZA).
Example 4
Xanthe and William are trustees of a discretionary trust. They purchase a residential property with a view to exercising their power to allow Frederick, who is a member of the class of beneficiaries, to occupy the property and Frederick owns no other property. The trustees will still pay the higher rates of SDLT as they are treated as the purchaser and paragraph 13, read with paragraphs 2, 4 and 7, charges the higher rates . The beneficiary is only treated as the purchaser where the trust is a bare trust or life interest trust.
Assuming suitable powers of appointment or advancement are available in the settlement, it would be open to the trustees to appoint the trust fund, or part of it, onto appropriate life interest trusts for Frederick before buying the property. If this were done and Frederick owned no other residential properties, the trustees would then pay the lower rates of SDLT.
Note that a corporate trustee, like any other company, would in any event pay the higher rates of SDLT (paragraphs 4 and 7). This applies where the company is treated as the purchaser i.e. where the trust is discretionary. The lower rates can still apply where a corporate trustee buys the first property for a beneficiary who has a life interest in the trust as the corporate trustee would not be treated as the purchaser.
Buying multiple properties
As mentioned above, if trustees buy six or more properties in a single transaction, the lower, non-residential rates of SDLT apply.
Where two or more dwellings are purchased (whether in a single or linked transaction) “multiple dwellings relief” under Schedule 6B Finance Act 2003 is available. “Multiple dwellings relief” must be claimed.
The effect of the relief is that the tax is charged on each property based on the average price of all the properties. SDLT is charged at the higher rates.
If, for example, trustees bought four properties for £1 million, the average price would be £250,000. The SDLT payable on each property would be £10,000. The total SDLT would therefore be £40,000.
If SDLT had been charged on the total consideration of £1 million, the SDLT would have been £73,750.
Where the Trustees acquire six or more residential properties in a single transaction, they have the option of paying the non-residential rates or paying the higher residential rates but claiming multiple dwellings relief.
Example 5
The trustees of the Viper Trust acquire a terrace of ten houses for £1.25 million. The SDLT on the whole purchase value at the non-residential rates, would be £52,000.
The Trustees could alternatively opt to pay the higher residential rates, but claim multiple dwellings relief. In this case, the average price of each property is £125,000. The SDLT on each property at 3% would be £3,750 and the total SDLT would be £37,500.
So on these figures, the trustees would be better off claiming multiple dwellings relief.
The SDLT anti-avoidance rule: Section 75A Finance Act 2003
It is beyond the scope of this article to look at the SDLT anti-avoidance provision in any detail. However, it is important points for trustees to be aware of it and I mention it briefly.
Section 75A Finance Act 2003 is an extremely broad anti-avoidance rule. It can apply to any land transaction and can apply where there is no tax avoidance motive.
Very broadly, one has to compare the SDLT chargeable on the transaction or transactions which have actually taken place with the SDLT which would be payable on a notional land transaction consisting of the disposal of the land from the vendor to the purchaser. If the SDLT on the notional land transaction is more than the SDLT on the actual transactions, the higher amount of SDLT may be payable.
This has been a particular issue for offshore trustees “de-enveloping” property held in offshore companies, especially where debt is involved.
Paragraph 8 of Schedule 4 Finance Act 2003 provides that the assumption or release of a debt by the purchaser can be “chargeable consideration” for the acquisition of property on which SDLT is chargeable.
Where trustees have funded the company which bought the property by way of loan, and the company is liquidated (generally a transaction not subject to SDLT) the trustees will receive the property and the debt will be extinguished. In these circumstances, the trustees are not regarded as giving any taxable consideration for the receipt of the property. HMRC have set out in guidance that the extinction of the loan is not regarded as consideration.
However, in more complex situations where there is third party borrowing and the de-enveloping involves repaying the debt or replacing or waiving it before the liquidation, section 75A can be a point and great care is needed.
Conclusion
As with other areas of tax, it is important for trustees to understand their liabilities.
The starting point in the case of a trust other than a bare trust, is that the higher rates of SDLT will be payable. However, where the trust is a life interest trust or has life interest funds or where such funds can be created using the trustees’ powers, it may be possible to reduce the SDLT rates to the normal levels. Clearly, the trustees will need to liaise with the relevant beneficiary to make sure that the beneficiary is aware of the impact on his own personal position. If the trustees plan to make extensive investments in property, it is worth trying to structure them in such a way that they are eligible to claim multiple dwellings relief and/or the non-residential rates of SDLT.
This article first appeared in the Trusts & Estates Law and Tax Journal in February 2018 under the title ‘SDLT: A solid investment?’