Guidance around the application of Land Transaction Tax in relation to trusts.
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(section 42 and Schedule 8)
Specific rules set out the responsibilities of trustees and how LTT applies in relation to interests in trusts and to the acquisition of a chargeable interest through the exercise of a power of appointment or a discretion.
The responsibilities of the trustee and beneficiaries in LTT depend on the kind of trust in which the land is held.
There are 2 basic types for the purposes of LTT:
- bare trusts which include nominee arrangement
- settlement trusts.
LTTA/5260 Bare trusts
A bare trust in England, Wales and Northern Ireland or simple trust in Scotland, is one in which each beneficiary is absolutely entitled as against the trustees to the property comprised in the trust.
‘Absolutely entitled’ broadly means that:
- the beneficiary may acquire or receive the trust property either immediately or by giving the requisite notice to the trustees in accordance with the terms of the trust
- the trustees have no power over or right to deal with the trust property without the permission of the beneficiary who enjoys absolute entitlement.
- the trustees are required to meet certain out goings or expenses of the trust
- and refuse to make trust property available to the beneficiary until such out goings or expenses have been met
the determination of whether the beneficiary is absolutely entitled to the trust property as against the trustees is not affected.
2 or more people may be absolutely entitled as against the trustees to trust property, provided that each of them has the rights to the trust property described above.
Where a person acquires a chargeable interest as bare trustee, LTT applies as if the interest was vested in, and the acts of the trustee in relation to it, were the acts of the person or persons for whom they are trustee.
Accordingly, if a bare trustee or nominee acquires property on behalf of the beneficiary, that will be treated as an acquisition by the beneficiary. The beneficiary is the person who has responsibility for submitting the return and is also the person responsible for paying the LTT. The return should therefore be made in the name of the beneficiary and not the trustee.
More guidance on the meaning of absolutely entitled can be found in the HMRC Capital Gains Manual at CG34320-34352.
Bare Trusts: leases
Unlike the position set out above, where a lease is granted to a person as bare trustee, that person, rather than the beneficiary, is treated as the buyer of the lease. Similarly, where the lease is granted by a person as bare trustee, that person, rather than the beneficiary, is treated as the seller/grantor of the lease.
Accordingly, the bare trustee is responsible for submitting any returns and paying any tax.
A settlement for LTT is any trust arrangement other than a bare trust. There are many types of trust arrangement.
Common examples are:
Interest in possession trusts
This type of trust exists when a beneficiary, known as an income beneficiary, has a right to the income of the trust as it arises. The trustees must pass all of the income received, less any trustees’ expenses and tax, to the beneficiary (or beneficiaries, as the case may be).
A beneficiary who is entitled to the income of the trust for life is known as a life tenant under a trust established in England, Wales or Northern Ireland or a life-renter under a trust established in Scotland.
The income beneficiary often does not have any rights over the capital of this kind of trust. Normally the capital will pass to a different beneficiary or beneficiaries at a specific time in the future or following a specific future event.
Trustees of a discretionary trust generally have discretion about how to use the capital and income of the trust. They may be required to use any income for the benefit of particular beneficiaries but they can decide how much is paid and to which beneficiaries.
The beneficiary of a discretionary trust has no right over or interest in the capital or income of the trust.
There are other kinds of trust that are not bare trusts and so will be regarded as settlements for the purposes of LTT. These include accumulation and maintenance trusts, mixed trusts which are mixtures of more than one type of trust, and trusts set up under the laws of foreign jurisdictions.
LTTA/5280 Settlement trusts: acquisition by trustees
When the trustees of a settlement acquire land or an interest in a partnership, the trustees will be regarded as the purchasers for LTT, therefore all the rules regarding notification and payment relate to the responsible trustees. It is the trustees rather than the beneficiaries who are responsible for completing the return and paying any tax due.
The trustees of the settlement are also treated as owning the whole of the chargeable interest at the point of transferring the property out of the trust. The deemed buyer of an interest is therefore also deemed to be the seller, if and when disposing of the same interest.
There are specific provisions for the purposes of the application of the higher rate residential property transaction rules to an acquisition of an interest in a dwelling by the trustees of a settlement.
LTTA/5290 Settlement trusts: responsibilities of trustees
Where a settlement trust is liable to pay tax, interest or penalties, the amount owing can be collected from anyone of the responsible trustees.
However, no penalty or interest on such a penalty will be recovered from a person who did not become a ‘responsible trustee’ until after the ‘relevant time’.
The ‘responsible trustees’ in relation to a land transaction are the persons who are trustees at the effective date of the transaction and any person who subsequently becomes a trustee.
The ‘relevant time’ is:
- in relation to a penalty that arises on a particular day (for example a late filing penalty) or interest on that penalty, the beginning of that day, and
- in relation to any other penalty or interest on that penalty the time when the act or omission that caused the penalty to become payable occurred (for example in relation to a penalty relating to an error in a return the relevant time will be the date the return was filed).
LTTA/5300 Settlement trusts: relevant trustees for purposes of return
A return for a land transaction can be made by any one or more of the trustees who are responsible trustees for the transaction. These are the relevant trustees. Whilst the return may be made by any one of the trustees, the declaration must be made by all of the relevant trustees.
LTTA/5310 Settlement trusts: relevant trustees for purposes of enquiries and assessments
If the WRA issues a notice of enquiry concerning a return made in relation to a land transaction entered into by a settlement trust then:
- the notice opening an enquiry must be issued to each of the relevant trustees whose identity is known to the WRA
- the information powers available to the WRA are exercisable separately and where appropriate differently to each of the relevant trustees
- any relevant trustee can request a direction for a closure notice and all relevant trustees are entitled to be parties to that application
- any closure notice must be issued to each of the relevant trustees whose identity is known to the WRA.
A determination must be made against all relevant trustees whose identity is known to WRA. The determination is not valid unless the notice is given to each of the relevant trustees whose identity is known to the WRA.
An assessment must be made in the names of all relevant trustees whose identity is known to the WRA. The assessment is not valid unless the notice is issued to each of the relevant trustees whose identity is known to the WRA.
LTTA/5320 Settlement trusts: relevant trustees for purposes of appeals and reviews
Where an enquiry is to be settled by a settlement agreement all of the relevant trustees must be a party to that agreement.
A notice requesting a review of an appealable decision may be made by any relevant trustee.
Where such a review is undertaken by the WRA following a request by some, but not all, of the relevant trustees:
- the WRA must issue a notice of the review to each of the other relevant trustees that were not a party to the request
- any of the relevant trustees who were not a party to the request may be a party to the review if they so notify the WRA of that desire in writing
- the notice of the WRA’s conclusions of the review must be issued to every relevant trustee whose identity is known to the WRA
- the effect of the conclusion of the review applies to all relevant trustees.
In relation to an appeal:
- the appeal may be brought by any of the relevant trustees
- a notice of appeal must be issued to each of the relevant trustees who did not make the appeal and whose identity is known to the WRA
- any relevant trustee is entitled to be a party to the appeal
- the tribunals determination is binding on all relevant trustees.
LTTA/5330 Interests of beneficiaries under certain trusts
Where a property is held in trust under Scottish law or the law of a country or territory outside the United Kingdom, on terms which under the laws of England, Wales and Northern Ireland would give a beneficiary an equitable interest in the trust property, then any beneficiary is to be treated as having such an interest, even if no such interest is recognised by the law of Scotland or such other country.
Additionally, an acquisition of the interest of a beneficiary under the trust will also be treated as involving the acquisition of an interest in the trust property.
LTTA/5340 Changes to the trustees of a continuing settlement
Trustees of a settlement are treated as a single and continuing body of persons.
It follows that for a continuing settlement, a change in the composition of trustees is not a land transaction. This means in particular that there is no charge on such an occasion where trust property is secured by a mortgage or other borrowing.
Since there is no land transaction for LTT purposes on a change in the composition of trustees of a continuing trust, a land transaction return should not be completed.
Where such a change results in an application to HM Land Registry, a covering letter should accompany the application unless it is obvious from the documents that they relate to such a change.
LTTA/5350 Consideration for exercise of power of appointment or discretion
Where a chargeable interest is acquired by virtue of:
- the exercise of a power of appointment
- the exercise of a discretion vested in trustees of a settlement
any consideration given by the person in whose favour the power or discretion is exercised, is treated as consideration for the acquisition.
These rules will ensure that LTT will be charged in the unusual case where a person pays trustees, or someone else, in order that the power or discretion may be exercised in their favour. For example, where that person makes payment to a beneficiary so that they may benefit from the land held in the settlement trust.
Therefore, where consideration is provided to the trustees in exchange for the exercise of their power of appointment so that an interest in land passes out of the trust to a person, the consideration so provided is treated as consideration for the acquisition of the relevant interest in land.
LTTA/5360 Reallocation of trust property between beneficiaries
Where the trustees of a settlement allocate chargeable interests held in the trust so that:
- a beneficiary acquires an interest in one trust property and ceases to have an interest in another trust property, and
- the beneficiary consents to no longer having an interest in that trust property
the fact that the beneficiary has given consent does not represent chargeable consideration. In such cases there is therefore no land transaction. This is similar to the rules relating to the partitions.
However, in the event that consideration is given otherwise from one beneficiary to another to effect the reallocation, that will be chargeable consideration under the exercise of a power of discretion.
LTTA/5370 Pension funds
Transactions involving pension funds
Any transaction where a pension fund is the buyer, is subject to LTT in the same way as any other transaction. There are no special rules for pension funds, as such LTT will be due where there is chargeable consideration for the transaction.
Therefore a pension fund that acquires a property and pays consideration, will be liable to make a return if the transaction is notifiable and to pay any tax liability arising.
Transfers between pension funds
This occurs where there is a transfer of assets and obligations from one pension fund to another, for example on the payment of a statutory cash equivalent transfer value for an individual, or on a merger of funds.
The transfer of land from the trustees of one pension fund to the trustees of another is the acquisition of a chargeable interest. This means it is within the scope of LTT.
The normal charge to tax under LTT arises on the consideration given for the land transaction.
There are no special rules for pension funds. LTT will only be due where there is chargeable consideration for the transaction.
The assumption by the transferee fund, or by the trustees of the transferee fund, of obligations to provide benefits is not chargeable consideration.
If other consideration is given by the transferee fund, or trustees of the transferee fund, in the form of money or money’s worth, then that will be chargeable consideration.
There would also be chargeable consideration if the transfer of obligations was in consideration of a defined monetary sum to be satisfied by the release of obligations by the former trustees.
LTTA/5380 Borrowing and mortgages
A pension fund may borrow money and may grant a mortgage or other charge over land as security.
For LTT purposes it is necessary to consider the borrowing and the mortgage separately in the context of a transfer described above.
If the transferee fund, or trustees of transferee fund:
- assume an existing liability of the transferor fund or trustees of the transferor fund to repay borrowing, or
- otherwise bring about the release of the transferor fund or trustees of the transferor fund from the debt, and
- they do so as part and parcel of such a transfer
then the WRA will not treat paragraph 8, Schedule 4 LTTA (‘debt and consideration’) as meaning that there is chargeable consideration given for the land transaction.
Mortgages and other legal charges are security interests and dealings with them, including their creation and release, are specifically exempt from LTT.
A land transaction for no consideration is exempt from notification. Where there are linked transactions and one element is liable for LTT even though it is not notifiable, but other transactions are notifiable, then the WRA will expect the non-notifiable element of tax due to be added to the tax paid in the land transaction return for the notifiable element.
Pension fund A transfers all its assets to Pension fund B, these assets include land and property in Wales as well as land in England and a portfolio of stocks and shares. There is a £500,000 mortgage secured on the property in Wales and the transfer is subject to this charge plus a sum of £2.3m. The transfer of the land in Wales is a land transaction for LTT. The chargeable consideration for the LTT transaction will be a just and reasonable apportionment of the £2.3m (i.e. the amount that relates to the Welsh property) plus the £500,000 debt. The obligation to provide benefits to A’s pension holders is not chargeable consideration.
LTTA/5390 Acquisitions of land by pension fund trustees
Where pension fund trustees acquire land, otherwise than as part of a transfer described above, whether or not from another pension fund, LTT is due on the consideration given in the normal way.
LTTA/5400 Transfers between pension funds: in specie transfers
A transaction in which a pension fund purchases property is subject to LTT where there is chargeable consideration in the same way as any other transaction.
However, the assumption of the obligation to make future pension payments to the beneficiaries of the pension fund by the acquiring pension fund (and the related removal of those obligations by the disposing pension fund) will not be considered to chargeable consideration in relation to such transactions.