Writing for Taxation magazine, BKL tax adviser Terry Jordan answers a query on the potential stamp duty liabilities when property is transferred to a trust.
I have a client who would like to set up an interest in possession trust into which he will transfer a residential property. The beneficiary will be the life tenant who does not own any other properties. Am I correct that the trust would not need to pay the extra 3% stamp duty on transfer?
Looking to the future, what would be the tax position if the trustee later appoints beneficiaries to the interest in possession trust who do own residential properties? What happens to stamp duty? Will extra then be payable and does it matter that there are separate beneficiaries occupying different properties?
Further, what would be the position if, in the first situation described above, the life tenant later purchases a property of their own? What are the stamp duty land tax implications for them and the trust at that time?
Query 18,992– Trustee.
Reply by Terry ‘Lacuna’ Jordan
On the premise that the transfer into the interest in possession trust is to be by gift so that no chargeable consideration passes there will be no stamp duty land tax (SDLT) payable on the transfer.
Therefore, the beneficiary with the interest in possession will be regarded as the owner of the property for the purposes of the extra 3% SDLT charge. FA 2003, Sch 4ZA para 10 provides that a beneficiary who is entitled to occupy a property for life or who is entitled to the income earned from it is treated as the purchaser, not the trustees.
If the life tenant later buys a property of their own they will be liable to the extra 3% SDLT on the personal property, but the trust will not have a liability at that point.
FA 2003, Sch 16 para 8 covers reallocation of trust property as between the beneficiaries.
Because the value in the trust will be relevant property for inheritance tax purposes and therefore within the scope of ten-year and proportionate or ‘exit’ charges, regardless of whether the terms are discretionary or not, creating interests in possession might seem an unnecessary complication with the only benefit being a restriction of the trustees’ liability to income tax to the basic rather than to the trust rate.
