HMRC SDLT: Understanding Bare Trusts: Nominees Ltd Holds House on Trust for Beneficiary X
Bare Trusts: Example
This section explains the concept of bare trusts using an example where Nominees Ltd, a corporate trustee, holds a house on trust for a beneficiary, X. The trustee’s role is limited to following X’s instructions, while X has full control over the property and its income.
- Nominees Ltd holds a house on trust for beneficiary X.
- X is entitled to the rental income from the house.
- X can decide what to do with the house.
- Nominees Ltd can only act on X’s instructions regarding the house.
- The house is registered in the name of Nominees Ltd.
- If a bare trustee acquires property, it is considered an acquisition by the beneficiary.
- The beneficiary is responsible for stamp duty land tax and submitting the land transaction return.
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Read the original guidance here:
HMRC SDLT: Understanding Bare Trusts: Nominees Ltd Holds House on Trust for Beneficiary X
Understanding Trusts and Powers: SDLTM31710A
What is a Trust?
A trust is a legal arrangement where one party, known as the trustee, holds property or assets for the benefit of another party, called the beneficiary. The trustee manages the assets according to the terms of the trust.
In this article, we will focus on bare trusts and how they work in relation to Stamp Duty Land Tax (SDLT).
What is a Bare Trust?
A bare trust is a straightforward type of trust. In a bare trust:
– The trustee holds the property or assets in their name.
– The beneficiary has the right to the benefits, such as income or use of the assets.
– The trustee must follow the beneficiary’s instructions regarding the management of the property.
Example of a Bare Trust
Let’s consider an example to illustrate how a bare trust operates:
– Trustee: Nominees Ltd is the corporate trustee.
– Beneficiary: X is the person who benefits from the trust.
– Property: Nominees Ltd holds a house on trust for X.
In this example:
– The house is rented out, and the rents generated from the property are income that belongs to X.
– X has complete control over what happens to the house. They can make decisions about selling it, renting it, or even living in it.
– The only role of Nominees Ltd is to act according to X’s directions. They cannot make unilateral decisions about the property.
– Although the title to the house is registered in the name of Nominees Ltd, it is clear that X is the beneficial owner.
Stamp Duty Land Tax Implications
When dealing with property and trusts, it is essential to understand the implications of Stamp Duty Land Tax (SDLT).
In cases of a bare trust:
– If a bare trustee or nominee acquires property on behalf of the beneficiary, this is treated as if the beneficiary themselves has acquired the property.
– Therefore, the beneficiary is responsible for paying any applicable SDLT.
– The beneficiary must also submit a land transaction return to HM Revenue & Customs (HMRC).
Key Concepts Related to Bare Trusts and SDLT
Here are some important concepts to keep in mind regarding bare trusts and Stamp Duty Land Tax:
– Beneficial Ownership: This refers to the right to the benefits of an asset, even if the legal title is held by someone else. In our example, X is the beneficial owner of the house, even though it is formally held by Nominees Ltd.
– Trustee Responsibilities: Trustees must act in the best interests of the beneficiaries. They cannot make decisions that would disadvantage the beneficiaries without their consent.
– Tax Liabilities: The person recognized as the beneficial owner is responsible for any tax liabilities. This means that even though Nominees Ltd holds the property, X will need to pay STI and file the necessary forms with HMRC.
– Land Transaction Return: This is a form submitted to HMRC, detailing the purchase of property and the related SDLT. The beneficiary, in this case, X, must submit this return.
Process of Setting Up a Bare Trust
Setting up a bare trust involves a few simple steps:
1. Choose the Trustee: The trustee is the individual or organization that will legally hold the property. In our example, this is Nominees Ltd.
2. Identify the Beneficiary: Clearly specify who the beneficiary is. This would be X in our example.
3. Property Transfer: The legal title of the property is transferred to the trustee. This is often done through legal paperwork that will need to be lodged with the land registry.
4. Draft the Trust Document: Although bare trusts tend to be less complex, it is still beneficial to have a document that outlines the terms of the trust, including the powers of the trustee and the rights of the beneficiary.
5. Register the Title: The property must be registered in the name of the trustee. For our example, the land registry would show that the house is owned by Nominees Ltd.
Legal and Tax Considerations
When setting up and managing a bare trust, there are key legal and tax considerations that should be taken into account:
– Legal Duties of the Trustee: Trustees must adhere to legal standards of care and diligence. They should keep accurate records and ensure that they operate within the bounds of the trust’s terms.
– Tax Responsibilities of the Beneficiary: Besides SDLT, beneficiaries may have additional tax responsibilities depending on how they generate income from the trust property. For example, rental income will typically be subject to income tax.
– Changes to Trusts: If a trustee decides that changes are needed in the terms of the trust, they must ensure that these changes comply with legal standards and are in line with the best interests of the beneficiary.
– Transfer of Assets: If a bare trust is dissolved or if assets are distributed to beneficiaries, there might be tax implications. It is advisable to consult a tax professional to understand these fully.
Common Misunderstandings about Bare Trusts
There are some common misconceptions regarding bare trusts that need clarification:
– Trustee Ownership: Many believe that the trustee has ownership rights over the property. In a bare trust, while the trustee holds legal title, the beneficiary retains all economic benefits from the asset.
– Flexibility in Beneficiary Rights: Some might think that the trustee has the power to change who the beneficiary is. This isn’t the case in a bare trust because the beneficiary’s rights to the asset are fixed.
– SDLT Exemptions: There is a myth that property held in a bare trust is exempt from SDLT. Although it is true that the property acquisition is treated as if it belongs to the beneficiary, thus making them liable for SDLT, exemptions may arise in specific circumstances, under certain conditions.
Filing Requirements with HMRC
When a bare trust is set up or property is transferred:
– The beneficiary will be responsible for completing the land transaction return.
– This return must include details of the property transaction, including purchase price and other relevant details that determine the SDLT owed.
– The return must be submitted to HMRC within 14 days of the completion of the transaction. Failure to do so may result in penalties.
Final Notes on Bare Trusts
Bare trusts offer a simple solution for holding property where the beneficiary has clear entitlement and control. Here are a few final remarks on managing bare trusts:
– Always maintain transparency: Ensure that the beneficiary is fully informed of their rights and responsibilities concerning the property.
– Record Keeping: Both trustees and beneficiaries should keep thorough records of trusts and transactions.
– Professional Advice: Seeking legal and tax advice can be invaluable in managing the complexities associated with trusts. This ensures compliance with all regulations and enhances the proper handling of the trust’s assets.
By understanding these basic principles and procedures related to bare trusts, individuals can navigate the expectations and responsibilities associated with them more effectively.
Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: Understanding Bare Trusts: Nominees Ltd Holds House on Trust for Beneficiary X
