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HMRC internal manual

VAT Land and Property

HM Revenue & Customs
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Taxable person: land and buildings owned by more than one person: what happens where there are a number of beneficiaries?

VATLP04240 does not normally apply where there are a large number of beneficiaries, such as in a pension fund. This is because the beneficiaries will not be entitled to the benefit of the consideration (for example, rent), but to a different sort of asset, such as a pension or proceeds from a financial investment. In addition, VATLP04240 only applies where the benefit of the consideration accrues to the beneficiaries collectively or as a class. It would not, for example, apply where the consideration accrues to some beneficiaries, but not others.

You may encounter a number of different sorts of trust. The following provides a description of some of the more common ones, together with some comments on the likely VAT treatment. However, it is difficult to provide hard and fast rules as the treatment will depend on the specific terms of the trust. Where you are in any doubt you should seek further guidance from the Land and Property Unit of Expertise.

(a) Trusts of land (joint ownership)

Land may be owned by more than one person. For example, two developers may form a joint venture to develop and exploit land. In such cases the beneficial ownership of the land will be held by the developers jointly, whilst the legal ownership may be held by one or more than one person for their benefit. Quite often the legal owner is one of the beneficial owners. You will need to establish who the beneficial owners are by making enquiries of the legal owner and examining appropriate documentation. We will normally see the beneficial owners as making the supply, and as being the persons who have incurred the input tax relating to that supply. The type of trust formed is normally a ’bare trust’. These are described in more detail below.

(b) Trusts with numerous beneficiaries, such as pension funds

Most pension funds will involve a portfolio of properties and other assets. The fund is managed by an administrator or ’fund manager’, often an insurance company. As the beneficiaries have a contractual right to a pension and not to the rental income from the property, the benefit of the consideration is not normally seen as accruing to them. As a result, it is the trustee (often the fund manager) that is making the supplies for VAT purposes. Self invested pension funds (SIPP’s) are organised on a similar basis. Investors may bring a specific property to a scheme. However, they are a beneficiary of the fund from which their pension will be paid and not of the specific property.

(c) Securitisation

Under such schemes finance is provided in return for a right to an income stream from a building or other capital item. What the financier receives is a beneficial interest in a debt and not in the asset (the building) itself. For that reason VATLP04240 would not apply.

(d) Bare Trust

A common form of trust in which the trustee or nominee holds legal title to the property on behalf of the beneficiary or beneficiaries. Under the trust deed the trustee must act in accordance with the instructions of the beneficiary, who can call for legal title to be transferred at any time. The beneficiary is entitled to any income from the land. Where land is held in a bare trust VATLP04240 applies and the beneficiary is treated as making the supplies.

(e) A Life Interest Trust

The details of such trusts will vary and it is therefore necessary to consider the specific terms of the trust deed. Typically, a beneficiary (or life tenant) will be able to use the property for the duration of his life (this will normally include the right to any rental income). The property, however, may not be disposed of. On his death the property passes to another beneficiary (the remainder man). Under most such trusts any income does accrue to the life tenant during his life time and as result he is seen as making the supplies for VAT purposes. However, in cases where the life interest is limited it may be a term of the trust deed that rental income accrues to the trustee.

(f) Discretionary Trusts

Property may be placed in a discretionary trust by a settlor with the intention that it will benefit certain individuals or groups. The settlor will not specify exactly what each beneficiary is entitled to and it is left to trustees to distribute income as they see fit. The terms of such trusts vary enormously; they may, for example be exhaustive (all income must be distributed), or non-exhaustive (trustees can decide whether or not to make a distribution). It is unlikely that VATLP04240 would apply, as in most cases the beneficiaries have no absolute right to the consideration (the amount distributed is subject to the trustees’ discretion). .

(g) Accumulation and Maintenance Trusts. Trusts for Minors

The terms of the trusts may vary. Such trusts are, however, set up where an individual wishes to establish a fund from which his children or dependents may be provided for during his lifetime. Alternatively, a property may be held in trust until a minor reaches the age of 18. In the meantime, any income accumulates in a fund managed by trustees. The VAT treatment in both cases would depend on the terms of the arrangement. Where for example it was clear that the benefit of the consideration accrued to a fund out of which the beneficiaries would benefit only indirectly or at a later date according to the wishes of the settler, then it is unlikely that VATLP04240 would apply.

(h) Unit Trusts

There are two main types.

(i) Unit trusts using widely held funds involving a number of investment assets including properties.

Under such arrangements there will usually be a large number of investors and a portfolio of assets including property. This is an investment vehicle with investors having a contractual right to income from the trust fund as opposed to a beneficial interest in individual properties.

(ii) Unit trusts using a single or small number of properties (discrete unit trusts).

Ownership of a property may be transferred to a unit trust in return for units that equate to the value of the property. The vast majority of the units (as much as 99.9%) are held by the major investor with the balance often held by a connected person. The key feature of this type of unit trust is the small number of investors (beneficial owners). The major investor also usually retains a high degree of practical control over the property. The VAT treatment, however, will depend on the precise terms of the trust and the extent to which the beneficial owner has a right to the benefit of the consideration. In most cases such structures should be treated, as with other unit trusts, as financial products as the beneficiary will only have an indirect right to any income from the property. However, in some arrangements (such as ’Baker’ trusts) the beneficiaries may have a direct right to income from the property but not to the capital proceeds (proceeds from the disposal). Where you identify such structures you should refer to the Unit of Expertise.

(i) Limited Partnerships

These structures are often used in relation to property developments where a number of parties are involved. Limited partnerships comprise of ‘general’ partners (actively involved in the management of the property business) and ‘limited’ partners (investors who are not liable for the debts of the business and are prevented under the Limited Partnership Act 1907 from taking any part in the management and running of the partnership business). The VAT treatment will depend on the ownership of the property. Where the property is held as a partnership asset it is normally the general partner that should be registered for VAT purposes as a sole proprietor (or partnership, where there is more than one). Where, exceptionally, the property is not a partnership asset it is normally the beneficial owners (under VATLP04240) that should be registered.