A Question of Trust: Dwellings and the 3 per cent SDLT Surcharge

On 1 April 2016 a Stamp Duty Land Tax (SDLT) surcharge was introduced for certain purchases of dwellings, such as second homes and investment properties. This works by increasing the current SDLT bands by three percentage points: so the 0 per cent band becomes 3 per cent, 2 per cent becomes 5 per cent, 5 per cent becomes 8 per cent and so on. For example, if the rules apply the SDLT liability for the purchase of a dwelling for £500,000 will increase from £15,000 to £30,000.

If the purchaser is an individual, the additional rate will apply to purchases of a “major interest” in a dwelling (freehold or lease exceeding 7 years) where:

1. The chargeable consideration is £40,000 or more. 
2. The new dwelling is not subject to a lease of 21+ years. 
3. At the end of the effective date of the purchase the purchaser owns an interest in another dwelling (anywhere in the world) which has a market value of £40,000 or more and is not subject to a lease of 21+ years. 
4. The dwelling being purchased is not replacing the purchaser’s only or main residence.

It is important to note that for “major interest” purchases by non-individuals (eg, companies or certain trusts), there are fewer requirements for the 3 per cent charge to apply: only elements (1) and (2) above. Accordingly, thinking of the new 3 per cent charge as the “additional dwellings surcharge” is dangerously misleading for non-individual purchasers. They can be subject to it even if they own no other dwellings.

Where co-purchasers are acquiring a dwelling, the 3 per cent charge applies if any of those purchasers is caught by the rules above. For these purposes, spouses and civil partners are generally looked at together so, if one of them already owns a residential interest, the surcharge will apply – even to a purchase by the other one alone. This rather draconian treatment does not apply if the spouses or partners are separated.

Technically, the new 3 per cent charge will catch circumstances where a chain of transactions falls through, meaning that the purchase of a new home takes place before it has been possible to sell the old property (leaving the purchaser with two dwellings temporarily). In these cases, the homeowners will clearly be caught by the “owning two residential properties on the day of completion” test, but, so long as the old home is sold within 3 years it will be possible to claim a refund from HMRC of the additional tax paid once the sale of the original main residence has completed. Notwithstanding the refund provisions, the initial application of the 3 per cent surcharge to scenarios where a chain of home acquisitions breaks down is likely to cause significant financial strain in circumstances which are already fraught.

What about where a trust is involved?

Here it is important to identify the type of trust in question, as different considerations apply.

Bare trusts

This arises where the beneficiaries are absolutely entitled to the trust property, including where the beneficiary simply can’t own the legal title for some reason (such as age or disability). A “nominee purchaser” arrangement is also a bare trust. In these cases, HM Revenue & Customs (HMRC) simply looks through the trust and treats the beneficiary as owning the property. So the surcharge will apply or not by reference to the position of the beneficiary.

Life or income interest trusts

For the purposes of the 3 per cent charge, this is where the beneficiary is entitled either to occupy the dwelling for life, or to receive trust income from the dwelling. Broadly speaking, a beneficiary of this kind is treated as owning the dwelling personally so, if they purchase a property personally, the additional rates could apply to that transaction. Because the beneficiary would be caught by these rates, any purchases by the trust are also potentially subject to the surcharge.

In both these cases it does not matter that legal title to the trust’s residential property will not be registered in the beneficiary’s name, and it is also generally irrelevant whether the trustees personally own residential property interests (although parents’ interests may be relevant where a minor child is involved).

Other types of trust

For example, discretionary trusts where the trustees have discretion to apply capital and income for different beneficiaries at different times. Here HMRC ignores the beneficiaries and simply treats the trust as a non-individual purchaser. This means the additional rate will always apply if the trustees purchase a major interest in a residential dwelling with a market value of £40,000 or more, and which is not subject to a lease of 21+ years, regardless of whether any other residential property interests are involved.

These new rules clearly make purchases of certain dwellings more expensive than pre-April this year, and care must be taken to ensure facts are fully investigated so that purchases can be correctly returned to HMRC.