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HMRC SDLT: SDLTM31700 – Application: Trusts and powers: Introduction FA03/S105 and FA03/SCH16

Trusts and Powers in Stamp Duty Land Tax (SDLT)

The rules surrounding trusts and Stamp Duty Land Tax (SDLT) are described in paragraphs FA03/S105 and FA03/SCH16. These sections explain the roles of trustees, as well as how SDLT applies when someone gets a chargeable interest by using a power of appointment or exercising discretion. Understanding these concepts is essential for anyone involved in property transactions that include trusts.

Roles and Responsibilities of Trustees

A trustee is a person or organisation that holds property on behalf of another party, known as the beneficiary. The responsibilities of a trustee in relation to SDLT can vary based on the type of trust involved. The key duties of a trustee include:

• Managing the property according to the terms of the trust.
• Ensuring compliance with tax obligations, including SDLT.
• Acting in the best interest of the beneficiaries.

In the context of SDLT, trustees must pay particular attention to how property is held and what type of trust it is. This influences how SDLT is calculated and paid.

Types of Trusts in SDLT

For SDLT purposes, trusts can be classified into two main categories:

• Bare Trusts: These are simple arrangements where the trustee holds the property on behalf of the beneficiaries, who have an immediate and absolute right to the trust’s assets. An example would be a parent holding a property in trust for their child, allowing the child full control and ownership once they reach a certain age. You can find more details about this type of trust in SDLTM31710.
• Settlements: These are more complex arrangements involving detailed rules about how property will be managed and distributed among beneficiaries. For example, in a family trust, property may be held for multiple beneficiaries, with specific conditions around access and distribution. The rules governing settlements are located in SDLTM31720.

Chargeable Interests and Powers of Appointment

When trustees acquire a chargeable interest in property, SDLT may be applicable. A chargeable interest is essentially an interest in land that is liable for SDLT. This often occurs when a trust property is transferred to a beneficiary or when a property is sold. The rules are particularly important when a trustee exercises a power of appointment or makes decisions on how trust property is used.

A power of appointment gives a trustee the ability to decide who gets a particular interest in the trust property and under what conditions. For example:

• In a family trust, a trustee might have the power to appoint the family home to one child while providing financial assistance to another without transferring the property.
• This flexibility means that SDLT calculations can differ depending on how the power of appointment is exercised.

It’s vital for trustees to understand that any transfer of property, even as a result of a power of appointment, can trigger SDLT. Therefore, correct valuation and reporting are important to avoid penalties.

Calculation of SDLT in Trusts

The calculation of SDLT on a property held in trust usually depends on:

• The current market value of the property being transferred.
• The specific circumstances surrounding the transfer, including whether it involves a bare trust or a settlement.

For instance, if a property is sold by the trustee to a beneficiary, SDLT will be calculated based on the sale price. If the property remains within the trust and a chargeable interest is created through other means, the SDLT will be based on the fair market value at that time.

Filing and Payment of SDLT

Trustees are responsible for ensuring that SDLT returns are filed and that the tax is paid on time. Here’s how this typically works:

• Upon a chargeable event, the trustee must submit an SDLT return, typically within 14 days of the transfer.
• Payment of the SDLT must also be made by the same deadline to avoid interest and penalties.

Failing to file or pay SDLT on time can lead to significant financial consequences, including fines imposed by HMRC. Therefore, it’s crucial for trustees to be diligent in meeting their SDLT obligations.

Beneficiaries’ Responsibilities

While trustees hold legal ownership of the trust property, beneficiaries also have a role regarding SDLT. Their main responsibilities include:

• Understanding how the trust operates and the potential tax implications for the transfer of property.
• Being aware of their rights to the trust’s assets, especially when the trust is winding down or property is being sold.

Beneficiaries may wish to discuss the tax implications with their trustees, especially if they are expecting to inherit property or if the trust’s assets are being sold.

Practical Examples

Understanding the application of SDLT in trusts can be easier with practical examples:

• Example of Bare Trust: A grandparent sets up a bare trust for their grandchild, placing their house in the trust. The grandchild has an immediate right to the property. If the grandparent decides to sell the house, the SDLT will be based on the selling price, and the trustee must submit the applicable returns and payments.
• Example of Settlement: Consider a family trust that holds multiple properties managed by a trustee. The trust specifies that when one sibling reaches a certain age, they can inherit one of the properties. If the trustee transfers the property to this sibling, the SDLT will be calculated on the property’s current market value, and the appropriate SDLT filing must occur.

Conclusion

Knowing how SDLT applies to trusts, along with the duties of trustees and beneficiaries, is important for anyone involved in property management. By following the guidelines set out in the relevant sections of FA03/S105 and FA03/SCH16, individuals can ensure compliance and avoid potential issues with HMRC.