HMRC SDLT: Understanding FA03/SCH16/PARA7: Consideration in Trusts and Power of
SDLTM31760 – Application
This section explains the principles and concepts of FA03/SCH16/PARA7, focusing on trusts and powers. It addresses how consideration is treated when a power of appointment or trustee discretion is exercised, specifically in unusual cases where payment influences the exercise of such powers.
- Applies when a chargeable interest is acquired through a power of appointment or trustee discretion.
- Consideration given by the beneficiary is treated as consideration for acquisition.
- Not applicable to normal trust transactions.
- Targets cases where payment is made to influence the exercise of power or discretion.
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Read the original guidance here:
HMRC SDLT: Understanding FA03/SCH16/PARA7: Consideration in Trusts and Power of
Understanding Trusts and Powers in the Context of Property Acquisitions
When dealing with property and financial transactions involving trusts, it is important to grasp certain legal rules that apply. One such rule can be found in FA03/SCH16/PARA7, which focuses on situations where an individual acquires a chargeable interest by either:
- Exercising a power of appointment
- Exercising a discretion that is held by trustees
This article unpacks the meaning of these terms and explains the implications for transactions involving trusts and powers of appointment or discretion.
What is a Chargeable Interest?
A chargeable interest commonly refers to property that is subject to stamp duty. Essentially, if someone acquires an interest in a property or land, this can trigger a stamp duty charge, meaning they may need to pay a tax based on the value of that interest.
Power of Appointment Explained
A power of appointment is a legal right given to a person (known as a donee) to decide how property within a trust should be distributed among beneficiaries. For example, a parent might leave property in a trust for their children and grant one child (the donee) the authority to decide how that property should be divided among all siblings. The donee’s decision on the distribution is what is referred to as the exercise of a power of appointment.
Discretion Held by Trustees
Discretion vested in trustees refers to the flexibility that trustees have in managing and distributing the trust’s assets. Trustees have a duty to act in the best interests of the beneficiaries, but they may have the discretion to choose how and when to distribute assets. For instance, if a trust has money that needs to be distributed, trustees may decide to give the funds all at once or in stages, depending on the circumstances and the beneficiaries’ needs.
How Consideration is Treated
According to FA03/SCH16/PARA7, any payment made by an individual whose benefit derives from the exercise of a power or discretion is regarded as part of the consideration for acquiring the property. This concept can be quite specific and mainly applies in non-standard situations.
Here’s a clearer example to illustrate this point:
- Imagine a scenario where a person pays the trustees of a family trust a certain amount of money to receive a piece of property. In this case, the money paid is seen as consideration for acquiring that property. This applies even though the trustees technically hold the legal title to the property.
Normal Trust Transactions
FA03/SCH16/PARA7 does not apply to usual trust actions. Normal operations of a trust, where assets are managed according to the terms set out in the trust deed without any external payments, are not impacted by this provision. In these standard situations, the trustees would administrate the trust as per their responsibilities, with no additional payment affecting the distribution of assets.
What is Consideration?
Consideration, in legal terms, refers to something of value that is exchanged in a transaction. In the context of property acquisition, it can include money, property, or services provided as part of the agreement. Generally, for a transaction to be valid, there must be consideration provided by all parties involved.
Drilling Down into the Legal Language
The legal text from FA03/SCH16/PARA7 is structured explicitly to cover the specific cases mentioned earlier. It is focused on ensuring that when a person engages in a transaction where they benefit from a power of appointment or a discretion exercised by trustees, the value received is clearly accounted for as consideration. This provision helps maintain transparency in property acquisitions, ensuring that any financial exchanges made are recognised and treated accordingly under tax law.
Implications for Beneficiaries
Beneficiaries involved in trust transactions should understand these rules to avoid unexpected tax burdens. Here are essential points for beneficiaries to note:
- Being aware that if they induce the trustees or someone else to exercise their powers to obtain property, this may have tax implications.
- Understanding that making a payment to gain access to property in a trust can affect how stamp duty is calculated based on what they pay for their benefit.
- Recognising that standard distributions from the trust will not trigger these considerations since they do not involve extra payments.
Example Scenarios Illustrating the Concepts
To better understand how this provision operates, let’s use practical examples:
- Example 1: A woman, Jane, is a beneficiary of a trust set up by her parents. Jane wants to acquire a property that the trust owns. She approaches the trustees and offers to pay £50,000 in return for the property. This payment is considered consideration for the acquisition of the property under FA03/SCH16/PARA7, meaning stamp duty will be assessed based on the amount Jane paid.
- Example 2: In another case, Alex is a trustee managing a family trust. Without any outside payment, Alex decides to distribute property to another beneficiary, Mark. Since there is no payment involved in this transaction, FA03/SCH16/PARA7 does not come into play, and no extra consideration is recorded or taxed.
- Example 3: Laura has a power of appointment concerning a family trust and decides to sell a portion of the trust’s assets to her friend for £100,000. Here, Laura’s payment serves as consideration, and stamp duty will be calculated accordingly on that sale price.
Conclusion
Navigating trusts and the exercise of powers or discretion can be complex, particularly in financial transactions. Being aware of the implications of FA03/SCH16/PARA7 and its definition of consideration can help beneficiaries and those involved in trusts make well-informed decisions. Understanding when and how these rules apply along with the importance of consideration is crucial for managing tax obligations related to property acquisitions.
For more detailed information regarding specific cases, you may refer to further resources or consult with a legal expert.
Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: Understanding FA03/SCH16/PARA7: Consideration in Trusts and Power of
