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SDLT: Trust Sub-Funds: Acquisitions or Exchanges of Land |
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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, warns of a potentially unexpected SDLT charge.ContextAn exchange of land between two family trusts (with or without payment of any equality money) or the acquisition of land for cash by one trust from another will attract SDLT in the ordinary way. In particular, with an exchange, each side of the transaction is chargeable (FA 2003 s47). What is less clear is the case where, within a single settlement (at least, one for CGT purposes), there is an exchange (or acquisition) of land as between distinct funds or sub-funds. What is the correct analysis? It matters hugely in terms of both substantive liability to SDLT and indeed compliance.An approachThe moot point seems to be whether ‘settlement’ for SDLT purposes equates to a settlement for CGT purposes or whether the expression could embrace an identifiable fund within the settlement. The appropriation as between funds would constitute a land transaction if it were the acquisition of a chargeable interest in land (s 48(1)). But there would have been no such acquisition at least where the trustees of each fund of the same individuals: the trustees continue to hold the legal estate in each property, the appropriation making no difference. If it is not a land transaction at all, it becomes unnecessary to decide whether it is a chargeable transaction, which it would not be if there were no chargeable consideration.If it were a land transaction, however, the question would become: ‘Who is the purchaser?’ A person cannot be a purchaser unless he has given consideration for, or is a party to, the transaction s 43(5). Accordingly, it is hard to see how (as argued by the Revenue: see below) a beneficiary could be the purchaser. He would have played no part in the appropriation (having no power to appropriate, his consent not being required and it being unnecessary for him to take any steps to perfect the appropriation). Incidentally, the SDLT Manual states that the disposition of property to a beneficiary under a trust in accordance with the terms of the trust is not chargeable to SDLT, there being no consideration for the acquisition (SDLTM 00520 and 00530). The same should apply in relation to an appropriation made to give effect to an income beneficiary’s share in the trust fund. Not being a chargeable transaction, nor would it be a ‘notifiable transaction’ under s77(3). In other words, the purchaser for SDLT purposes can only be trustees and if the trustees of each fund are the same individuals there can be no purchaser. What if each fund has separate trustees? Then it might be arguable that the definition of ‘settlement’ as ‘a trust that is not a bare trust’ (in FA 2003 Sch 16 para 1(1)) is wide enough to embrace sub-funds. If each sub-fund is treated as a separate settlement and the acquiring trustees are a purchaser within s43(5), the requirement in the case of a notifiable transaction, both to deliver a land transaction return and to pay the tax due would seem to follow under s76 – providing that that is a correct view of para 1(1) of Sch 16. The moral would appear to be: Ensure that, before the documents are signed, the trustees of each sub-fund, if different, are made the same individuals. But that is not the end of the story! The present HMRC view: income beneficiaries are purchasersThis whole area was the subject of correspondence and conversations last year by me with, in particular, Phil Gurney of Policy Division based in Manchester. Although the view (vigorously contested) was then put forward that, whether in a life interest or even in a discretionary case, it was the beneficiary who was the purchaser, I got the impression that the Revenue were then moving away from that view. It was conceded that, certainly in a discretionary case, the amount of consideration measured on an actuarial basis given by any discretionary beneficiary would be minimal. And I got the impression (wrongly as it now turns out) that it was only in the sort of case where, applying powers in the settlement, an income beneficiary acquired property in his own name on the basis of security given by the trustees of trust property that there could be SDLT implications in relation to the trust: that is of course not the sort of situation under consideration here.However, it appears from a March 2005 response to a COP 10 ruling which I have seen that, certainly in a life interest case, the Revenue continue to take the view that the transfer of land from one sub-fund to another sub-fund within the same settlement is a land transaction for SDLT purposes. And that the purchasers are not the trustees, but the beneficiaries, with the consideration being valued according to the actuarial value of the relevant life interest. CommentWe have all been warned. Certainly I cannot see how this Revenue view can be correct – except perhaps in the rare example of a Settled Land Act Trust. But otherwise the beneficiaries would not be a party to the transaction. The only respect in which I suppose a beneficiary might be said to have given consideration would be if after the acquisition or exchange he was entitled to less income than he had received before. But there is no general market value rule for SDLT purposes and the measure of the income foregone (if capitalised on an actuarial basis) would be very different from the actuarial value of the life interest itself.This is an issue set to ‘run and run’ I fear and meanwhile firms with clients in such circumstances should consider carefully the issue of compliance. June 2005 Matthew Hutton 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, 23 July 2005 |
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