Avoid additional 3% stamp duty by buying a second property in a trust

August 31, 2018|In KRW Tax Tips|By Keith Witchell

The additional 3% surcharge rate of stamp duty land tax that applies on the purchase of a second property is notoriously hard to avoid.

Since the arrival of the 3% surcharge rate of stamp duty land tax in April 2016, we’ve been on the lookout for ways around this extra property tax for our clients. But with the surcharge applying to all limited company residential property purchases, and also catching properties owned by spouses, it seems impossible to avoid.

However, we have found a possible solution, which might be used by clients wishing to engage in family tax planning arrangements to benefit their adult children.

If an interest in possession trust is formed for the benefit of your adult children (i.e., those aged 18 and over) and the settled funds are used to buy a residential property which will be let out, then the 3% stamp duty surcharge refers to properties already owned by those adult children. If they don’t yet own their own properties then the 3% surcharge will not apply to the property purchase.

Similarly, the purchase of a property by a discretional trust will also usually avoid the surcharge.

The downside of the interest in possession trust is that when your adult children later come to buy their own properties they will then face the 3% surcharge on those properties, since the trust property will be classed as their first residential property for these purposes. However, the trust can be converted to a discretionary trust prior to this and this situation can then be avoided.

There are downsides to the trust structure, not least the fact that they face the highest 45% tax rate on their rental profits, although this can be mitigated by distributing the trust income to the adult children so that they can recover some of the 45% tax through their own tax returns.

There is also the need for annual trust accounts and a trust tax return to consider, which brings administrative costs, plus the legal fees associated with the creation of the trust.

In summary then, the use of a trust structure to buy a buy to let property for the benefit of your adult children is well worth considering for the stamp duty land tax saving, but it won’t be for everyone.

Key Facts

  • The 3% second property stamp duty land tax surcharge rate is notoriously hard to avoid
  • It also applies to all residential properties bought in a limited company (even the first)
  • Using an interest in possession trust can avoid the charge if for the benefit of adult children
  • A discretionary trust will also usually escape the 3% surcharge
  • There are many other tax and administrative implications to consider for a trust

For further advice on this matter, please contact me.

Keith Witchell