HMRC SDLT: SDLTM27076 – Reliefs: Right to buy transactions, shared ownership leases etc: Shared ownership trust: cases where election not made FA03/SCH9/PARA10-12
Shared Ownership Trust: Election Not Made
This section of the HMRC internal manual discusses the principles and concepts related to shared ownership trusts, particularly in cases where an election is not made under FA03/SCH9/PARA10-12. It provides guidance on the following:
- Understanding the reliefs available for right to buy transactions.
- Explaining shared ownership leases and their implications.
- Clarifying the conditions under which elections are not made.
- Outlining the legal framework and tax considerations.
Stamp Duty Land Tax and Shared Ownership Trusts
Introduction to Shared Ownership Trusts
When it comes to shared ownership trusts, understanding how stamp duty land tax (SDLT) is applied is vital. A shared ownership trust allows a purchaser to own a portion of a property while the remaining share is held by a housing provider or similar organisation.
Market Value Election
In a situation where a market value election is not made, the rules for charging SDLT on a shared ownership trust declaration work as follows:
– The initial capital is regarded as consideration (the amount paid for something purchased) other than rent.
– Any rental or rent-equivalent payments made are considered actual payments of rent.
This means that the calculation of SDLT will depend on how the transactions are defined, especially in regards to initial and ongoing payments.
Equity-Acquisition Payments
Equity-acquisition payments are amounts that a purchaser pays to increase their share in the property. The rules around these payments include:
– If, after making an equity-acquisition payment, the buyer’s beneficial interest remains at 80% or less of the total beneficial interest in the property, then these payments and the resulting increase in interest are exempt from paying SDLT.
– Conversely, if the buyer’s beneficial interest exceeds 80% after such a payment, or if the trust is terminated and an interest in the property is transferred to the purchaser, those payments will be subject to SDLT.
Key Considerations
1. Beneficial Interest: This represents the amount of property an individual effectively owns. In the context of a shared ownership trust, it reflects your ownership percentage in the property.
2. Equity-Acquisition Payments: Payments made to buy additional shares in the property. Understanding when these payments incur SDLT is crucial for managing costs.
3. SDLT Rates: The percentage of SDLT payable may vary based on the value of the property and other factors defined by government guidelines.
Determining Tax Rates on Declarations
When determining the SDLT rate applicable to the declaration of a shared ownership trust, it is important to note that the declaration is treated distinctly. The treatment ensures the following:
– The declaration is regarded as separate and does not consider any equity-acquisition payment that has already been made by the purchaser.
– The declaration does not factor in any transfer of an interest in the trust property upon its termination.
This means that the SDLT calculation is focused solely on the declaration itself and the starting capital rather than any ongoing payments or changes in ownership percentages that come later.
Examples to Illustrate the Principles
Example 1: Exemption from SDLT
Consider a buyer who purchases a 40% share of a property through a shared ownership trust. They later decide to acquire an additional 30% of the property share. At this point:
– The buyer owns 70% of the property after the second purchase.
– Since their beneficial interest (70%) is below the 80% threshold, the equity-acquisition payment does not attract SDLT.
In this scenario, the initial capital payment and the rent payments are the primary financial considerations, with no SDLT incurred on the additional equity-acquisition payment.
Example 2: Subject to SDLT
Now, imagine the same buyer decides to acquire an additional 20% share later on. After this purchase:
– The buyer’s total beneficial interest is now 90% (40% + 30% + 20%).
– Since the interest in the property has exceeded the 80% threshold, the equity-acquisition payments made for this additional 20% share are now subject to SDLT.
In this case, SDLT will be calculated based on the increased beneficial interest.
Example 3: Transfer on Trust Termination
In another scenario, if the shared ownership trust reaches its end and a purchaser who initially owned 60% of the property receives a further 20% stake in the property:
– The purchaser’s total interest becomes 80%.
– At this point, should the full interest be transferred, SDLT would apply because there was an increase beyond the original beneficial ownership structure established at the start of the trust.
This example highlights how transfers upon the ending of a trust can trigger SDLT.
What to Remember
When dealing with shared ownership and SDLT, keep in mind:
– The election status: Whether or not a market value election is made impacts tax calculations.
– The thresholds for beneficial interest: Understanding the 80% threshold is essential for anticipating whether SDLT will be charged on equity-acquisition payments.
– The role of trust declarations: SDLT will focus on the declaration itself, not on subsequent payments or transfers related to beneficial interests.
By parsing these principles, individuals can better navigate the complexities of stamp duty land tax when entering a shared ownership arrangement. It’s always recommended to consult with a financial advisor or tax expert to fully understand personal circumstances and obligations regarding SDLT and shared ownership trusts.