HMRC SDLT: SDLTM31720 – Application – Trusts and powers: Settlements

Principles and Concepts of Trusts and Powers in Settlements

This section of the HMRC internal manual focuses on the application of trusts and powers within settlements. It provides guidance for HMRC staff on handling such matters effectively.

• Explains the legal framework governing trusts and powers.
• Details the responsibilities of trustees in managing settlements.
• Outlines the tax implications for different types of trusts.
• Provides examples of common settlement scenarios.
• Offers procedural advice for HMRC staff.

Understanding Trusts and Settlements for Stamp Duty Land Tax (SDLT)

A settlement for Stamp Duty Land Tax (SDLT) refers to any trust arrangement that is not classified as a bare trust. Trusts can come in various forms, each with unique characteristics and rules. Below are explanations of some common types of trusts, as well as their implications for SDLT.

Types of Trusts

Interest in Possession Trusts

An interest in possession trust grants a beneficiary, known as an income beneficiary, the right to receive the income generated by the trust as it becomes available. The trustees are obligated to distribute the income to the beneficiary, minus any of their own expenses and any tax incurred.

• The beneficiary entitled to the income for their entire lifetime is termed a life tenant in England, Wales, and Northern Ireland. In Scotland, they are referred to as a life-renter.
• Typically, the income beneficiary does not have any claim to the capital of the trust. Instead, the capital is set to be passed on to other beneficiaries at a specific point in time or under specific circumstances in the future.

Discretionary Trusts

In a discretionary trust, the trustees have the authority to make decisions regarding how to use the trust’s capital and income. While they may be obliged to apply any income for the benefit of designated beneficiaries, they have the freedom to determine the amount that will be distributed and which beneficiaries will receive it.

• Beneficiaries of a discretionary trust hold no direct rights to the trust’s capital or income. Instead, they may receive benefits as decided by the trustees.

Other Trusts

Additionally, several other trust types that are not bare trusts are considered settlements for SDLT purposes. These include:

• Accumulation and Maintenance Trusts: Trusts that accumulate income for a beneficiary over time or maintain funds for a minor until they reach adulthood.
• Mixed Trusts: Trusts that contain elements of multiple trust types.
• Foreign Trusts: Trusts created under the laws of other countries.

Trustees and SDLT Responsibilities

When trustees of a settlement purchase land, they are recognized as the purchasers for SDLT. This means that all standard rules regarding notification and payment of SDLT apply to the responsible trustees.

Who are Responsible Trustees?

• Responsible trustees are those who hold the position of trustees at the effective date of the land transaction. This includes any new trustees who may take over later.
• If someone becomes a responsible trustee only after the necessary time frames for SDLT have passed, they will not face penalties or interest related to any SDLT due at the time of the transaction.

Understanding Relevant Time Frames

The key time frames for SDLT penalties can be summarized as follows:

• For daily penalties or interest related to penalties, the relevant time starts at the beginning of the day.
• For other types of penalties or interest, the time begins when the action or omission that triggered the penalty took place.

Exercise of Power of Appointment

A power of appointment allows trustees to transfer interests in land to other parties. If consideration—that is, a payment or benefit—is made for the use of this power, it will be treated as consideration for the acquisition of a land interest. This means:

• If trustees receive compensation in exchange for transferring an interest in land from the trust to an individual through their power of appointment, that compensation counts as consideration for the acquisition of the land interest.

Further Information on Trusts

More detailed information regarding trusts, settlements, and their implications for SDLT can be found on the HM Revenue & Customs (HMRC) website, specifically in the Trusts and Settlements & Estates Manual. This resource provides deeper insights into how trusts are managed and the tax responsibilities associated with them.

For specific guidance on SDLT and its application to trusts, including any updates or changes to legislation, refer to the following link: SDLTM31720 – Application – Trusts and powers: Settlements.

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