Capital Gains Tax is a tax on the gain in the value of assets such as shares, land or buildings. A trust may have to pay Capital Gains Tax if assets are sold, given away or exchanged (disposed of) and they’ve gone up in value since being put into trust. The trust will only have to pay the tax if the assets have increased in value above a certain allowance. This allowance is known as the ‘annual exempt amount’. The assets of a bare trust are treated for tax purposes as if the beneficiary holds the trust assets in their own name. In a bare trust the beneficiary pays the tax as if they owned the assets directly.

If you’re the beneficiary you must declare any chargeable gains on your personal Self Assessment tax return.

As parties to a deed of trust are very often both Trustees and Beneficiaries they must declare any chargeable gains on their personal Self Assessment tax returns.

A Stamp Duty Land Tax (SDLT) return has to be submitted when there has been a transfer of an interest in land and the total consideration exceeds £40,000. This does not include gifts. If a property is mortgaged then this will be taken into account by HMRC, for example, if half a share in a property is transferred subject to a mortgage then it is presumed that the person receiving the benefit of the property is also taking on half of the mortgage debt.

The following examples illustrate situations when you need to consider SDLT implications:

Example 1

Property held in a sole name but the purchase price was contributed to by two people and the Deed of Trust declares it is held for the benefit of them jointly in the shares in which they contributed – either with or without mortgage.

No SDLT would be required – as there is no transfer of any interest in the property – the Deed of Trust is only recording what has been done. Any SDLT return would have been dealt with when the property was purchased.

Example 2

Property held in the sole name of Adam. There is no mortgage on the property. Adam gifts half of the property to Belinda and enters into a Deed of Trust to record that the property is now held for Adam and Belinda jointly.

No SDLT would be required – the transfer is by way of gift.

Example 3

Property held in a sole name of Chris. There is no mortgage on the property. Chris transfers a share of the property to Denise in consideration of a payment by denise and they enter into a Deed of Trust to record that the property now held for Chris and Denise jointly.

If the payment made by Denise is less than £40,000 then no SDLT return would be needed.

However, if the payment by Denise exceeds £40,000 then an SDLT return would be required. In this example no tax would be payable unless the current threshold is exceeded (£125,000 for residential properties)

Example 4

Property held in the sole name of Elouise. There is a mortgage secured on the property. Elouise transfers a share of the property to Fred in consideration of a payment by Fred and they enter into Deed of Trust to record that the property is now held for Elouise and Fred jointly.

If the payment made by Fred plus 50% of the mortgage debt is less than £40,000 then no SDLT return would be needed.

If the payment from Fred plus 50% of the mortgage debt did exceed £40,000 then an SDLT return would be required.  However in this scenario no tax would be payable unless the current threshold was exceeded (£125,000 for residential properties)

If it is necessary to complete an SDLT return then the main form is SDLT1 and sometimes a supplementary form SDLT4.

If you have any concerns about this you should refer to the HMRC web site at http://www.hmrc.gov.uk/sdlt/index.htm or telephone their help line on 0845 603 0135

The above is a very brief summary of SDLT requirements insofar as they may affect a Deed of Trust. If you have any concerns you should speak to your adviser or check directly with HM Revenue & Customs.

Each party’s share in a property forms part of their estate upon death and therefore should be included when determining any Inheritance Tax liability.

If a party decided to “gift” their interest in a property Inheritance Tax is sometimes payable if the person who put an asset (their interest) into the bare trust (via the deed of trust) dies within seven years of doing so. This is known as a ‘potentially exempt transfer’. The beneficiary is responsible for this tax. You can find out more about Trusts and Inheritance Tax here.

Trustees may receive income from investments such as bank interest, dividend income from stocks and shares or rental income from land or buildings. The beneficiary is liable for Income Tax on income received by the trust.

In accordance with the way in which our deeds are constructed, the Trustees and the Beneficiaries are very often the same people.

If you’re entitled to any income by virtue of the deed of trust, you should tell your tax office. If you don’t already do so, you’ll need to fill in form SA100 Self Assessment Tax Return. The beneficiaries are technically responsible for this tax, but it may be paid for by the Trustees (if they are of course different people).

One very common method that people use to mitigate their tax position is to vary the levels of each party’s shares in a property. Our deeds have been used for this purpose extensively. Further detailed information with regard to income tax is available from our HMRC Guidance page.