HMRC SDLT: SDLTM27073 – Reliefs: Right to buy transactions, shared ownership leases etc: Shared ownership trust: general conditions FA03/SCH9/PARA7
Shared Ownership Trust: General Conditions
This section of the HMRC internal manual outlines the principles and concepts related to shared ownership trusts under the Finance Act 2003, Schedule 9, Paragraph 7. It provides guidance on reliefs applicable to right-to-buy transactions and shared ownership leases.
- Explains the general conditions for shared ownership trusts.
- Details the application of reliefs in specific property transactions.
- Clarifies legal obligations under the Finance Act 2003.
- Offers insights into shared ownership lease arrangements.
Understanding Shared Ownership Trusts
A shared ownership trust is a legal arrangement involving land, as defined by the Trusts of Land and Appointment of Trustees Act 1996. This type of trust must meet specific requirements to qualify as a shared ownership trust.
Basic Conditions of a Shared Ownership Trust
To establish that a trust is a shared ownership trust, it must meet these key conditions:
- Type of Property: The property held in the trust must be a dwelling located in England. This includes:
- A building currently being built or modified to function as a home.
- Land designated for future construction of a dwelling.
- Land that will serve as the garden or grounds associated with the dwelling.
- Beneficiary Requirements: One of the beneficiaries of the trust must be a ‘social landlord.’ This term refers to a qualifying body, which can be verified through reference to SDLTM27020.
- Terms of the Trust: The mutual agreement (terms of the trust) must include specific provisions, outlined below:
- The trust must allow one or more individual beneficiaries, called ‘the purchaser,’ to use the trust property exclusively as their only or main residence.
- The purchaser must make an initial payment, referred to as ‘the initial capital,’ to the social landlord.
- The purchaser must also pay periodic charges known as ‘rent-equivalent payments’ to the social landlord, which serve as compensation in line with section 13(6)(a) of the Trusts of Land and Appointment of Trustees Act 1996.
- The trust must permit the purchaser to make other payments aimed at acquiring a larger share of the property. These are called ‘equity-acquisition payments.’
- The trust should clearly define the initial interests of both the social landlord and the purchaser based on the initial capital payment.
- It must specify a value that relates to the market price of the dwelling. This value is used to calculate the initial capital.
- The trust terms must ensure that the purchaser’s beneficial interest in the property increases over time, while the social landlord’s interest decreases or may even be completely removed as the purchaser makes equity-acquisition payments.
Key Terms Explained
To fully understand the concept of a shared ownership trust, it is important to clarify some key terms:
- Beneficial Interest: This relates to the rights of the purchaser and social landlord over the property. As the purchaser makes payments, their share increases, allowing them to have more control and ownership of the dwelling.
- Initial Capital: This is the first payment made by the purchaser to the social landlord. It is a significant sum that sets the starting point for the purchaser’s ownership share.
- Rent-Equivalent Payments: These are regular payments made by the purchaser to the social landlord. Considered a type of rent, these payments compensate the social landlord for their part in the ownership arrangement.
- Equity-Acquisition Payments: These payments allow the purchaser to buy more equity in the property over time. This means that as they pay more, they increase their ownership share.
Example of a Shared Ownership Trust Agreement
To illustrate how a shared ownership trust operates, consider the following example:
Emily wishes to buy a home valued at £300,000. She enters into a shared ownership trust agreement with a social landlord. As part of the terms:
- Emily agrees to pay £90,000 as her initial capital. This amount represents 30% of the home’s market value.
- The remaining 70%, or £210,000, is owned by the social landlord.
- Emily must pay a monthly rent-equivalent payment for the social landlord’s 70% share, which might amount to £500 each month.
- Emily can make additional equity-acquisition payments, allowing her to gradually increase her ownership percentage in the home.
- If Emily makes an further £30,000 equity-acquisition payment, her ownership share increases from 30% to 40%, and the social landlord’s share decreases accordingly.
Different Scenarios and Implications
Each shared ownership trust can have different outcomes depending on the terms agreed upon. Below are a few scenarios:
- Increasing Ownership: A key purpose of a shared ownership trust is to allow the purchaser to increase their share of the property. Higher equity-acquisition payments lead to increased ownership, which can be beneficial in the long run.
- Changing Needs: In situations where the purchaser’s financial circumstances change, they may choose to sell their share back to the social landlord or transfer it to another qualifying individual.
- Termination of the Trust: If the terms of the trust allow for it, the social landlord may regain full ownership of the property if the purchaser fails to meet payment obligations. This highlights the necessity for clear terms and conditions.
Legal Framework and References
The legal framework governing shared ownership trusts is based on the Trusts of Land and Appointment of Trustees Act 1996. To ensure compliance, parties involved in establishing such trusts should familiarise themselves with the full details, including the associated rights and responsibilities.
For further information or specific guidance, refer to the full HMRC documentation or the relevant acts governing shared ownership and trusts.
Important Considerations
When engaging in a shared ownership trust, consider the following:
- Financial Advice: It is advisable for purchasers to seek financial advice before entering into a shared ownership agreement to ensure they understand their financial commitments.
- Legal Assistance: Obtaining legal advice is also important. A qualified solicitor can help clarify terms of the trust and ensure that all parties’ interests are protected.
- Long-term Goals: Purchasers should consider their long-term goals regarding home ownership and financial stability before entering into any agreements.
In summary, a shared ownership trust provides a pathway for individuals to purchase a home while sharing the ownership with a social landlord. Understanding the terms, implications, and legal aspects is essential for those considering this route to home ownership.