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Stamp Duty Land Tax on 'second homes' and Interest in Possession Trusts
by Anne Smith

The additional 3% stamp duty land tax ('SDLT') rate on 'dwellings' has been effective for purchases on or after 1 April 2016. At first glance the principle appears simple. If you already have an interest in a dwelling and you wish to buy another dwelling which will not replace the existing property as your home, you will bear an additional rate of 3% above the applicable standard SDLT rate(s).

However the relevant definitions require attention and the net has been cast wider than you might intuitively expect.   We have come across a number of situations which have been unexpectedly caught.  For example, where a parent has taken a joint interest in their child's first home purely in order to support a mortgage application.  Assuming the parent already owns an interest in his/her own existing home, a joint purchase with the child represents a 'second home' purchase for the parent, and thus the child's new home purchase attracts the additional 3% charge on the whole price.

In situations caught, even for a new dwelling valued below the standard SDLT minimum threshold of £125,000, there will be a 3% charge levied if either the new or existing property interest is valued at more than £40,000, and the transaction results in the purchaser owning or being deemed to own more than one dwelling.

The legislation also appears to draw beneficiaries of interest in possession trusts into the higher rate in what many would consider to be an unfair manner.

Schedule 4ZA of the Finance Act 2016 details the circumstances in which the additional rate will apply.   Remember that a non-natural person, such as a company, is not excluded from the higher charge in relation to its first or only dwelling acquisition.  For individuals, the basic conditions for the additional 3% rate to apply to a purchase of a dwelling by one individual are as follows:

  • The chargeable consideration for the transaction is £40,000 or more, and
  • At the end of the effective transaction day, the purchaser already has:
    • a major interest in a dwelling other than the dwelling being purchased;
    • that interest has a market value of £40,000 or more, and
    • that interest is not reversionary on a lease which has an unexpired term of more than 21 years, and
  • The new dwelling is not a replacement for an existing only or main residence.

If the basic conditions above are satisfied then the purchasing individual will pay the additional 3% rate on top of the usual rates of SDLT based on the chargeable price of the new property. The top rate of SDLT could be as high as 15% for second properties valued at above £1.5million, as represented in the following rates table.

 

Property or lease premium or transfer value

Higher 'second home' SDLT rate

Up to £125,000

3%

The next £125,000 (the portion from £125,001 to £250,000)

5%

The next £675,000 (the portion from £250,001 to £925,000)

8%

The next £575,000 (the portion from £925,001 to £1.5 million)

13%

The remaining amount (the portion above £1.5 million)

15%

Application to trusts

Special rules apply for determining the additional SDLT rate liability with reference to trust properties, which may impact on trust beneficiaries.

Interest in possession and bare trusts

The beneficiary of a trust who under its terms is entitled to occupy a dwelling owned by the trust for life, or to income earned in respect of it, is treated for the purposes of the additional rate of SDLT, as being himself the owner of that dwelling.  Similarly he would be deemed the purchaser of such a dwelling acquired by the trustees.   (This overrides the normal SDLT rule which would otherwise treat the trustees as the purchaser.)

Therefore, for a life tenant of a dwelling held in an interest in possession trust (perhaps a family holiday home, or a property rented out commercially), should that individual beneficiary wish to purchase a residential property personally, perhaps as his first home, he will be caught by the additional SDLT rate. This may well come as a surprise to clients and some practitioners, where the individual himself does not already and has never previously owned his own home or any other residential property.

In the case of a bare trust also, the beneficiary is treated as the owner of residential property held in the bare trust, and correspondingly the beneficiary is regarded as the purchaser when a new dwelling is acquired by such a trust.  Again, this amends the normal SDLT rule that would treat the trustees as the purchaser. 

Note further that the interests of a beneficiary aged under 18 years are attributed to his or her parents, and any spouse or civil partner living together with one of the child's parents.

Discretionary trusts

 Individual trustees of a settlement will be treated as the purchasers of a trust dwelling, where there are no beneficiaries entitled to occupy it for life or to income from it.  However although the trustees are treated as purchaser, they are treated as non natural persons, and consequently there is no exclusion for such trustees from the additional rate of charge for a first or only dwelling acquisition, and the main residence exception from the additional 3% rate is not available.  Accordingly there is no advantage to be gained for SDLT purposes by setting up a discretionary trust to acquire a dwelling.

Take care!

There are many traps in these new rules for the unwary. 

Trust beneficiaries and indeed also trustees who are interested in buying a dwelling, should carefully consider the likely SDLT, as the additional cost may be substantial for some properties.