I have a situation where remaindermen are purchasing the life interest in a residential property from the life tenant (their mother). The remaindermen are minors and so a bare trust is being created by their father who is making the acquisition on their behalf.
I know that the life interest in a property is a chargeable interest for SDLT purposes (section 48 FA 2003) and if a minor is treated buying an interest in a dwelling by virtue of being a qualifying beneficiary of a bare trust, the child’s parents are treated as the buyer (para 12, Schedule 4ZA, FA 2003).
In this case the parents own other properties and so I am trying to ascertain whether the HRAD applies. I note that other commentators have stated that, in their view, the interest of the life tenant is not a property interest and so cannot be a “major interest” for the purposes of section 117 FA 2003.
The legislation focuses on the case where the life tenant is the purchaser (para 11 Sch 4ZA FA 2003) but in this case, they are the seller.
I have been unable to find any commentary or official guidance on this point and the HMRC guidance is poor. Taking a purposive interpretation of the legislation, as a result of the transaction the remaindermen will become absolutely entitled to the property as against the trustees and so they will unequivocally end up with a major interest in the property ….. however, I appreciate that that doesn’t necessarily mean that a major interest is being acquired! But HMRC’s intention in that case must surely be for the higher rates to apply - they already own lots of properties (or at least their parents do) and are acquiring another one …..
Can anyone point me in the right direction please?!
The life interest in land comprised in a settlement is a chargeable interest so its acquisition is a land transaction. Under s43(3)(b) the surrender or release of a chargeable interest is a disposal of it and an acquisition by the person whose interest is enlarged, so also a land transaction. It is not clear which of these is intended but both are chargeable transactions for SDLT.
Schedule 4ZA applies higher rates and para 12 applies not just where the acquisition is of a major interest, which a life interest in a settled major interest is not, within para 10 it also applies when para 11 is engaged. Para 11(3) requires a beneficiary to be the life tenant of a settlement of a major interest AND the trustees to dispose of it: it then treats the life tenant as disposing of it rather than the trustees. Para 12 then treats the life tenant as the purchaser of the interest instead of the minor child who would otherwise be the purchaser, as the beneficiary of a bare trust under para 3 of Sch 16. A reversal of reality. So higher rates will apply if the life interest is surrendered or released.
But if the trustees of the life interest settlement do not dispose of the settlement’s major interest the life tenant is not then deemed to do so. If the purchaser acquires the life interest of the life tenant they acquire an interest pur autre vie and when the life tenant eventually dies will acquire the underlying major interest by operation of law for no additional consideration. The price of the life will be discounted for the deferral, by reference to the LT’s life expectancy, and SDLT will be chargeable on it but not at higher rates because there has been no contemporaneous disposal by the trustees under para 11(3)(b).
This is however not a PET for IHT. The question does not indicate whether the life interest is a QIIP or NQIIP. If the first then there will be a charge under s51 reduced by the price paid but a CLT as the settlement continues. If the second there will be no RPT chargeable event at that point. The continuing settlement becomes a RPT or remains one.
For CGT there will not be an immediate absolute entitlement charge as the land remains settled property but there will be a deemed disposal when the original life tenant dies. Any gain arising will be taxable (even if the LT had a QIIP she will not own it at her death). Hold-over relief under s 260 will be available if the death causes a RPT exit charge which it must as the pur autre vie interest will be a NQIIP.
If the life interest is surrendered the settlement ends and the termination will be a PET if the life interest was a QIIP or a RPT exit charge if it was a NQIIP. There will be an absolute entitlement charge for CGT and s.260 hold over if it is not a PET.
Thank you so much for this but apologies, I am not sure I fully understand your second paragraph.
The remainder men are, by way of a bare trust, acquiring from the life tenant her interest in the trust. As the remainder interest will be fixed, the two interests should merge as a result of the acquisition of the life interest with the remaindermen becoming absolutely entitled to the property. Does that mean that the trustees are therefore treated as disposing of their interest in the property?
You make it clear that the life interest is not a “major interest” and I assume this is why para 11 was included in the legislation, to make sure that purchasers who have a life interest in a “major interest” still paid the additional rates. However, what I am not sure on is whether the legislation applies to redefine a “major interest” for para 10, where what is being acquired is the life tenant’s interest in the trust (which happens to have chargeable property as part of the trust fund).
Thanks in advance for your further help with this!
Accurate wording is critical here. In the real world where a person A assigns their life interest to another B the life interest does not end until A dies. Where A surrenders the life interest to the remaiderman it may end; typically this will be as part of a partition agreement with the remainderman C, whereby the life interest is assigned to C who thus owns both interests and they merge by operation of law.
If the remaindermen are C D and E, an assignment to one of them alone does not automatically end the trust, although if all three are adults they can choose to do so per Saunders v. Vautier. IHT regards both of these events as a termination of the life interest which results in a TOV if the life interest was a QIIP.
Para 11 (3) is designed in the circumstances within (1) and (2) to treat the beneficiary as owning the underlying major interest (contrary to law and reality) and also to dispose of it if the trustees actually do so. If the person who acquires the major interest is a minor child of the beneficiary, or a bare trustee for such a child per para 3(1) Sch 16, para 12 treats the beneficiary as the acquirer and not the child.
So yes I do think that the merger is a disposal by the trustees to the remaindermen. The life tenant does not own the major interest comprised in a settlement which is not a bare trust: the trustees do: para 4 Sch 16. Only they can dispose of it.
The merger occurs by operation of law but because it is triggered by a release or surrender of the life interest s43(3)(b) it constitutes a land transaction involving a disposal by the life tenant and an acquisition by the remainderman. So the otherwise tenable argument that operation of law is not a land transaction does not work. Para 11(3) is plainly based on that analysis.
In a situation where the life interest is assigned but does not end the trustees do not also dispose of the major interest so 11(3) does not apply. As the life interest is not a major interest the higher rates do not apply; there is still a land transaction because the life interest is a chargeable interest and if there is chargeable consideration it will be taxable at normal rates. If the life interest later ends e.g the former owner dies the life tenant is no longer a beneficiary for para 11(1) or (2) the assignee is; and even if that view is wrong there would be no further SDLT charge when the trustees dispose of the major interest to the remainderman because there would be no additional consideration.