SDLT: Trustees and executors beware

The higher stamp duty land tax (SDLT) charges for additional properties, which take effect on 1 April 2016, hold many traps for estates and trusts. Solicitors have a real opportunity to provide advice and to be proactive in flagging up the issues for clients, with potential new work reviewing property ownership within families.

This article is based on the proposals published on 28 December 2015. The legislation comes out with the Budget on 16 March, to take effect 15 days later. This leaves little time for new options, so we assume the final form will be much as proposed.

The extra 3 per cent SDLT will apply where the purchaser of a residential property owns any other property at midnight on completion day.

Main residence

There is an exception where the purchase is replacing a main residence but - a quirk in the proposed rules - this only applies where the previous main residence was sold within 18 months of the transaction. This seems unfair and many who do not realise this may be caught unawares.

A 'main residence' is a question of fact, so some who have elected for one of two as a principal private residence for capital gains tax may be caught.

Beneficial ownership

You 'own' a property if you have any share of beneficial ownership, however small, including as a beneficial owner under a bare trust or as a life tenant. Even a 5 per cent interest in a family holiday home, for example, could therefore affect a personal purchase. Many may have limited awareness that they are treated as 'owning' another property in these circumstances, especially if they are not legal owners and are not receiving taxable income.

You also 'own' if you inherit a share of a property. While there is no SDLT on the transfer out of an estate, once this is done, the inherited property is taken into account, however small the share. Remember:

• While it is not clear when an estate property is first taken into account, this is likely to be when it is transferred out by executors, including appropriations - transfers of the beneficial interest;

• There may be cases where executors want to postpone the distribution, for example, for a beneficiary using a cash inheritance to buy their first property. If this is done after owning an inherited property share, even if only temporarily, an extra 3 per cent SDLT is payable - even where the individual is buying a main residence. The exemption for replacing a main residence does not currently allow for a later sale of the estate property (as with the 18-month period for selling a main residence), unless it is never actually transferred or appropriated out of the estate, and is sold by the personal representatives as such; and

• It may be worth a deed of variation to create a discretionary trust, including the client as a beneficiary, if the extra SDLT exceeds the costs of the deed.

Any interest your spouse or civil partner 'owns' is taken into account, as you are seen as one. Setting up a company is no answer - that's caught too, even if it's a first property.

Trusts and settlements

Trustee purchases will always suffer the higher rate unless the property is bought as the main home of a beneficiary with an interest in possession or a bare trust. Both the trust and the beneficiary (and their spouse) must own no other residential property interest, or the purchase is to replace a beneficiary's home, where these conditions are satisfied.

Note:

• Clients may need to review trusts to see how beneficial interests are held to avoid beneficiaries being caught inadvertently;

• Some may want to ensure there is an interest in possession (IIP) in place. This can include not only an immediate post-death interest but potentially other IIPs, even if they are not 'qualifying' (i.e. taxable with the life tenant's own estate), if buying, for example, a life tenant's main residence, for occupying as such, no other property being owned by the trust, or selling a main residence in trust for that beneficiary, provided the life tenant holds no other property;

• Others may want to make the trust discretionary in form, for example if a beneficiary (who was a life tenant) is buying a property and doesn't wish the trust property to be taken into account, as it will be if it is an IIP.

Conveyancers should therefore ask clients carefully about other property interests, and offer to review and advise on options, if they are confident giving this advice. Potential fees can be compared with the potential SDLT charge (e.g. 3 per cent SDLT on £500K will be £15K), as it may be possible - although often it's not - to save SDLT. Can the charge be avoided by a change in ownership, for example, gifting a property interest to family as part of an inheritance tax-planning exercise? SJ

John Bunker is head of private client knowledge management at Thomas Eggar