First time buyers relief and trusts

Last year some clients came to me with what appeared to be a fairly innocuous situation.

Alice and Belinda's mother had established a discretionary trust over a holiday home and had appointed her daughters (Alice and Belinda) as the trustees.

Belinda died a few years ago and her son, Cameron, had been appointed as a replacement trustee.

When Alice and Cameron instructed me, neither of them owned their home. They thought it might be time to sell the holiday home held by the trust, divide the proceeds and each purchase their first homes, each of which would cost around £500,000. It all sounded very sensible.

Would first time buyers relief (FTBR) apply to Alice's and Cameron's personal purchases? On policy grounds, it felt as if the answer should surely be yes - their ownership as trustees should have no bearing on their personal position - but unfortunately the statute was not so clear.  

Under the SDLT legislation, "where persons acquire a chargeable interest as trustees of a settlement, they are treated... as purchasers". This is a problem because, in order for FTBR to apply, an individual cannot have been a purchaser in respect of a previous land transaction. What made even less sense was that, on one reading, Alice might not be able to benefit from FTBR because she initially acquired the holiday home when the trust was established, but Cameron might benefit from FTBR because he happened to be appointed as a trustee later.  

I am therefore delighted that STEP has this week published its correspondence with HMRC on this point (which followed directly on from the case of Alice and Cameron) confirming the position. HMRC has confirmed that in the scenario above both Alice and Cameron could benefit from FTBR on their personal purchases.

The correspondence also highlights that careful legal advice is required because the position remains complex, particularly where the trustees involved are also beneficiaries under the trust. 

Another example is in order!

David and Evie are trustees of a settlement which owns a house which is rented out. The trust is held on interest in possession trusts for David and Evie and so they each receive 50% of the rental income. David has not bought his first home and would like to do so. Again we assume that he will buy a £500,000 property.

If David goes ahead and buys his first home, he won't be able to qualify for FTBR. This is because FTBR is precluded where the 3% supplemental surcharge on the purchase of a second home applies. David has never lived in the trust's rental property, nor has he owned his own home. He may therefore be very surprised to hear that HMRC treats the purchase of his "first" home as his second. This is because HMRC views David as the owner of the trust's rental property because of his interest in possession. David has to pay £27,500 in SDLT.

However, the position is very different if David and Evie (as trustees) decide to sell the trust's rental property before David buys his first home. David is no longer within the 3% supplemental surcharge because, at the time he makes his personal purchase, he is no longer treated as owning the trust's rental property (which has been sold). In addition, as confirmed by the HMRC correspondence, David is not precluded from first time buyers relief by virtue of the fact that as trustee he previously owned a property. FTBR now applies to David's purchase and he pays only £3,750 in SDLT. 

Let's hope David (and Evie) took advice prior to David's purchase!  

Fred and Georgina are the trustees of an interest in possession trust for their daughter, Harriet. Harriet is just starting university and would like to buy her first home to live in whilst attending her course. Fred and Georgina think that it would be sensible for it to be bought by the trust given Harriet's young age. Unfortunately, FTBR will not apply to this purchase - the requirement is that the purchasers (which, for the purposes of FTBR, means the trustees) must intend to occupy the property as their only or main residence. This isn't the case and so the asset protection benefits of purchasing the property in the trust will need to be weighed against the less preferential SDLT treatment.

These examples show that:

• Very careful analysis is required which differentiates between someone's role as trustee and that of beneficiary. In addition, the nature of the beneficiary's interest is very important; if they have an interest in possession particular care is required.
• The SDLT 3% surcharge and FTBR rules take different approaches to interest in possession trusts.  The 3% surcharge looks through and treats the life tenant as purchaser, whereas the FTBR rules look to the trustees.  
• The SDLT legislation is very complex and the outcomes, where trusts are involved, can be unexpected.
• Take advice and take it before you exchange on the prospective purchase!

HMRC has said it will now update its guidance to reflect the correspondence.