Using a bare trust to provide for children to reduce tax
My wife and I have three children. I'm looking at ways to provide for them in the future and want more details on how bare trusts are taxed, please.
My plan is to provide some initial funds and then invest this on behalf of my children for their future. I would probably give them access to it when they were 18 to buy a car or use to fund university/travelling etc.
The funds would be invested in a selection of shares, unit trusts and investment bonds.
A bare trust looks like a good way of achieving this as firstly it allows their capital gains tax annual exemptions to be used, and secondly the amount in the bare trust would leave our estate for inheritance tax purposes.
Please confirm that this is the case and that there are no current changes to the bare trust regime that may impact of this.
Answer:
In the case of a bare trust you would own the legal interest on behalf of your children. They would therefore be absolutely entitled to the trust assets and income, and hold the full beneficial interest. Another way of expression this would be that you/your wife would simply be nominees.
As such in this case the beneficiaries of a bare trust have the right to take actual possession of trust property and should normally return the income and gains on their own personal tax returns with the trustees not being required to make a tax return.
Therefore in tax terms, the use a bare trust is effective in that it allows the children capital gains allowances to be utilised against any future gains on disposal. Note that there are anti avoidance rules to tax income on you personally but these would not apply to capital gains.
You should however take legal advice on the implications of using a bare trust. Usually a bare trustee would have full and immediate access to the trust funds.
In the case of minors they would not be able to hold property personally and property has to be held on trust for them. In a trust where a beneficiary has an 'indefeasibly vested' interest in the trust income and capital the trust is a bare trust and the income is classed as the beneficiaries irrespective of the fact that the trustee has duties to perform.
A bare trust would be a potentially exempt transfer for inheritance tax purposes. Therefore provided you survived for at least seven years the value of investments held on bare trust would be outside of your estates.
About the Author
The Author of this article/answer is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.
=============================================================
Disclaimer
=============================================================i) Please note that the articles/answers contain general guidance only and do not constitute accountancy, tax, investment or other professional advice.
ii) The contents of this article/answer are for information only and are intended to assist readers in identify any tax planning opportunities that may be available to them. The information contained in this answer is not intended to be a substitute for taking proper taxation advice and should not be relied upon in this way. Always consult a qualified accountant or taxation adviser. Your situation will then be looked at individually and specific advice relevant to your circumstances can be given. The Expert does not accept responsibility for any loss arising as a result of reliance on any information contained in this answer.
These Notes (and Disclaimer) do not affect your statutory rights in the United Kingdom.