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Trusts and stamp duty

Most (but not all) transactions involving trusts will be exempt from stamp duty, stamp duty reserve tax and stamp duty land tax. The transactions that will not be exempt are, in general terms, those where there is value given in exchange for the transfer of an asset into or out of a trust.

Stamp duty is a tax on documents that are used to complete transactions. Perhaps the best example of this is a Stock Transfer Form, which is used to complete the transfer of shares in a company from one shareholder to another -- and is ordinarily required by a company secretary or registrar in order to make the change on the company's share register.

Typically, stamp duty is an "ad valorem" tax, which means it is assessed as a percentage of the value of the transaction -- so on a share transfer of £10,000, stamp duty at 0.5% would amount to £50. In some limited circumstances that will rarely be relevant to trusts, there is a fixed stamp duty of £5, which ordinarily arises along with a requirement that the transaction in question be adjudicated as exempt from ad valorem stamp duty.

Stamp duty reserve tax is a special tax that was created in the 1980s so that stamp duty would, in essence, also apply to transfers that are affected by agreement rather than by way of a specific document. As it applies in fairly limited circumstances, most trustees are probably not likely to encounter stamp duty reserve tax.

Stamp duty has previously applied to documents for transactions involving land, but this changed in 2003 when stamp duty land tax (usually known as "SDLT ") replaced stamp duty on land transfer documents.

The rate of SDLT ranges from 0% to 7%, depending on the amount of "chargeable consideration" involved. For residential property, the 0% rate applies to chargeable consideration of up to £125,000 and the maximum 7% rate takes effect when chargeable consideration exceeds £2,000,000. The threshold amounts for non-residential property are slightly different.

Transfers Into Trusts

Since most assets that are settled onto trusts, whether lifetime trusts or trusts arising on death, are transferred by way of gift, stamp duty generally will not apply to them.

Similarly, SDLT generally will not apply to such transfers, since ordinarily no money changes hands when a person transfers land into a trust. Note, however, that SDLT may be payable if the land is subject to a mortgage when it is transferred. So if, for example, a person creates a trust during his lifetime and transfers a property into it on the basis that the trustees will assume an outstanding mortgage on the property, it will not be regarded as a transfer where no money changes hands.

Transfers To Trust Beneficiaries

As with the transfer of assets into a trust, the transfer of a trust asset to the beneficiary who is entitled to it will not ordinarily attract stamp duty or SDLT. There could, however, be transactions where a beneficiary, in effect, pays the trustees for all or part of an asset, and such transactions could give rise to stamp duty and/or SDLT.

Transfers in the Course of Administering the Trust

The trustees of a discretionary trust might purchase and sell shares, other financial instruments, property or land in the course of adjusting the portfolio of investments in the trust. These transactions would attract stamp duty and/or SDLT as they are not gifts or transfers of assets to beneficiaries who are entitled to them. Rather, the trustees are purchasing or selling assets for money as any other investor would.

Where trustees find themselves with, say, a portfolio of commercial leasehold properties, there are likely to be complicated SDLT calculations involved in any assignment or other transaction involving such properties. In those circumstances, trustees will need to protect themselves by taking professional advice from someone with particular expertise in stamp taxes.

Summary

Although the transfer of assets into and out of trusts should not ordinarily result in any stamp duty or SDLT liability, there can be circumstances where such liability does arise. In addition, where trustees are purchasing and selling company shares, land or certain assets in the course of administering a trust, stamp duty and/or SDLT will be payable.

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