“Beyond the everyday world, lies the world of SDLT VAT; a kind of fiscal theme park in which factual and legal realities are suspended or inverted”: the application of this maxim to the SDLT rules on bare trusts.
VAT specialists will hopefully forgive the deliberate misquotation of Lord Justice Sedley’s comments on the complexities of VAT. His comments on the deemed realities created by the VAT system are also applicable to the SDLT rules on bare trusts.
What’s the issue?
At law, a bare trust is a trust where the beneficiary is absolutely entitled against the trustee. A bare trust could be succinctly described as a look through arrangement. This principle tracks through to SDLT where the beneficiary is generally treated as the purchaser for SDLT purposes. This reflects the economic reality of the situation.
However, this general rule is inverted where a lease is granted to or by a bare trust. Here, the SDLT legislation treats the bare trustee as the vendor or the purchaser and not the beneficial owner. This is counterintuitive, as the economic ownership is ignored, and the bare legal owner who does not have the economic rights is treated as the party to the transaction.
There may have been good cause for drafting the legislation this way, namely, to defeat a historic avoidance arrangement. Under this planning, a person would grant a market rent lease to a bare trustee to hold on trust for themselves. Arguably, this would not generate an SDLT liability because a person cannot transact with themselves.
The market rent lease would then be assigned to a third party and, arguably, this was SDLT free. The intention was to turn a lease grant into an SDLT free transaction. So, there was good logic in drafting the legislation this way. However, whether this type of planning would survive in today’s avoidance denial landscape is a separate question: think section 75A, etc.
Deeming the bare trustee to be the vendor or purchaser in respect of leases has a number of unintended consequences. Say that an individual grants a long lease to a connected company for the company to hold the lease as a bare trustee for them. The connected company is treated as the purchaser, and this activates the market value rule, even though no actual consideration may move.
Tower One St George v HMRC [2025] EWCA Civ 1580
The deeming provision’s scope was considered by the Court of Appeal in Tower One St George.
This related to a split title where a company, SGSL, held the bare legal title for another group company, St George plc. The land value was reflected in St George plc’s accounts because it was the beneficial owner.
SGSL granted a lease intra group to a company, B64, which was subsequently assigned to Tower One St George. Tower One St George also acquired the share capital of B64.
HMRC successfully argued there was a section 75A notional transaction here under which “V” was SGSL. HMRC asserted that SDLT should be charged on the market value, but the taxpayer argued that a distribution exemption for SGSL applied to prevent a market value charge.
The Court of Appeal held that although SGSL was deemed to be the vendor for SDLT, the deeming did not go so far as to treat SGSL as beneficially owning the land which belonged beneficially to St George plc. So, deeming had its limits, and the distribution exemption was unavailable because SGSL had no assets to distribute.
The higher rate supplement
Generally, individuals who acquire a dwelling whilst already owning a dwelling pay a 5% SDLT supplement on top of the standard SDLT rates.
So, how do these rules work if a bare trust is involved in the transaction?
The default position is that the bare trust beneficiary is treated as the purchaser for the purposes of the two or more dwellings test. (This treatment applies even if a lease is granted to the bare trustee with the bare trustee being treated as the purchaser.)
However, this position is overridden if the bare trustee holds the property for a person who is under 18. Here the parents are deemed to own the property when applying the two or more dwellings test. Spouses and civil partners of the parents are put into the mix too, if they are living together.
Further, this treatment is in turn overridden if the trustee or any of the trustees have acquired the property under a relevant court appointment, namely an appointment under section 16 of the Mental Capacity Act.
These rules became a national news story in 2025.
The complexity does not stop here. For example, in establishing if the 2% SDLT supplement for non-UK resident purchasers applies, there is a further layer of trust-based architecture to consider too.
Can anything be done to address SDLT complexity?
The UK has the longest tax code in the world and complexity is hardwired into the system; SDLT is no exception.
Would the return of a body like the Office of Tax Simplification help?
The property market has the hallmarks of a national sport, in England at least. With that in mind, it may help if participants could be provided with greater educational awareness of the challenges involved so they are not too surprised when they walk into the “fiscal theme park”.
First published in Tax Journal.