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Nil Rate Band Discretionary Trusts and SDLT |
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Capital Tax Review by Matthew Hutton, MA, CTA (Fellow), AIIT, TEP Matthew Hutton MA, CTA (fellow), AIIT, TEP author of Capital Tax Review, comments on the possibility of avoiding a stamp duty land tax charge using the ‘IOU’ route to constitute the IHT ‘nil rate band’ on the first spouse to die.ContextCapital Tax Review (CTR Issue No 9 Winter 2005, Item 16) reported on the IR Statement issued on 12.11.04 about the SDLT implications of adopting, alternatively, the debt route or the charge route in constituting the nil-rate band of the first spouse to die. Although HMRC take the view that the debt route clearly involves an SDLT liability for the surviving spouse (insofar as the IOU is given in consideration of her receipt of a share or larger share in her late husband’s interest in the house), that should not be simply accepted. Of course, it is always possible to draft the documents such that that is the case, but equally it is possible to ensure, by careful drafting, that it is not. Indeed, it appears that at least one if not more solicitors have achieved the agreement of Stamp Taxes that under the IOU route as adopted no SDLT is payable. And the analysis is characteristically clearly set out in the latest edition of James Kessler QC’s Drafting Trusts and Will Trusts.Constituting the IOU by a spouse undertakingThe trustees of the discretionary Will trust have a right to a cash sum. That right is certainly not a chargeable interest for SDLT purposes. If it can be regarded as an interest in land, it is a ‘security interest’ for SDLT purposes which is expressly exempt from SDLT (FA 2003, s 48(2)(b)). That cash sum might be constituted by an undertaking by the surviving spouse (say the widow) to pay the amount. Importantly, she does not become entitled to receive her late husband’s share in the land by virtue of the undertaking. She was entitled to that land anyway under the Will. All that happens by giving the undertaking is that her entitlement has ceased to be subject to the burden of the trustees’ rights under the Will. Her undertaking has freed the land from the burden of paying the nil-rate band legacy. In particular, her undertaking does not involve an acquisition of a chargeable interest, so does not occasion an SDLT liability.A land transaction does occur when the PRs transfer the husband’s interest in the land to the spouse, through an assent, but that is exempt under FA 2004 Sch 3 para 3A – unless of course there is any consideration. But the widow is not giving consideration for an interest in land. She gives her undertaking in consideration of the PRs exercising their powers and the extinction of the trustees’ rights under the Will. At most her receipt of the land would be in consequence, but not in consideration, of her undertaking. She acquires the land as a residuary legatee and not as purchaser. (Drafting Trusts and Will Trusts by James Kessler QC, Update April 2005 to Nil-rate Band Trusts Appendix 4) CommentThis is a welcome clear analysis of how the IOU scheme documentation should be drawn so as to avoid an SDLT charge. Generally, it may be thought preferable in general terms to go the charge route, as adding greater substance to the arrangement so as to be able more easily to satisfy HMRC Capital Taxes following the second death. Certainly, in a case where there were lifetime gifts from the survivor to the deceased and FA 1986, s 103 is likely to present a problem in denying a deduction for the debt on the second death, s 103 is avoided by having the liability owed not by the surviving spouse but by the trustees of a Will trust established by the first to die. However, the simple IOU route does remain a runner in straightforward circumstances. Provided that both the initial documentation and the subsequent implementation of the scheme is carefully done, its effectiveness should be accepted following the second death. The spectre remains of HMRC challenging one or two perceived vulnerable debt routes before the Special Commissioners, though at the time of writing no firm information is known.October 2005 Matthew Hutton MA, CTA (fellow), AIIT, TEP More InformationThe above article has been taken from Matthew Hutton’s Capital Tax Review, a quarterly update for professional advisers of private clients. For more information, visit http://www.taxationweb.co.uk/books/capital_tax_review.php.About the AuthorMatthew Hutton is a non-practising solicitor (admitted 1979), who has specialised in tax for over 25 years. Having run his own consultancy (latterly through Matthew Hutton Ltd) until 30th September 2000, he now devotes his professional time to writing and lecturing.
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About The Author  Mark McLaughlin is TaxationWeb's Co-Founder, Director and Technical Editor. He is a Fellow of the Chartered Institute of Taxation and a member of the Association of Taxation Technicians and the Society of Trust and Estate Practitioners. He lectures on tax subjects, is co-author of Tottel's IHT Annual and Ray & McLaughlin's IHT Planning, and Editor of Tottel's Tax Planning and Annual series. Mark's work has also been published in Taxation, Tax Adviser, Tolley's Practical Tax, Tax Journal and Simon's Weekly Tax Intelligence. Since January 1998, Mark has been a consultant in his own tax practice, Mark McLaughlin Associates, which provides tax consultancy and support services to professional firms. He publishes a regular 'Tax Update' e-Newsletter for clients and other professional firms. To receive future copies, contact Mark via his website. |
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Article Added Saturday, 22 October 2005 |
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