Setting up a bare trust for children & UK tax

Question:

I am buying a property in my name in Italy.

I would like to give it to my son aged 14 to ensure it's not classed as part of my estate for inheritance tax.

Can you please tell me how to set up a bare trust for my Son and how I actually make the gift?

I have not made any other gifts to anyone.

Answer:

In tax terms it is the beneficial ownership of the property that is of crucial importance. Therefore provided the beneficial interest in the Italian property is held by your Son the property would initially be excluded from your estate.

You could either hold the property under a nominee agreement or under a bare trust. You would need to consult a solicitor to draw up a bare trust agreement however this is a straightforward document which will effectively state that your Son is absolutely entitled to the property and that you are holding the property on his behalf. In terms of effecting the gift the title to the property will simply remain in your name.

However for Inheritance tax purposes you will be treated as making a gift of the value of the property at the date of the bare trust on the basis that your estate has reduced by the value of the property. You would then need to survive for seven years from the date of the transfer to ensure that the value of the property is fully excluded from the value of your estate.

Another point that you should bear in mind is that in order for the property to be excluded from your estate after seven years for tax purposes, it would be essential that the transfer under the bare trust was not regarded as a gift with a reservation of benefit.

Essentially this would apply if you personally were to derive any benefit from the property (eg in terms of occupying it or obtaining rental income). If this was the case the actual transfer to your Son would not be excluded from your estate after seven years, and instead the value of the property would remain in your taxable estate, even if your Son was the actual beneficial owner of the property.

You should therefore ensure that you take detailed advice as to the use of bare trust arrangement given the benefit in kind provisions. It may be possible to argue that any rental income for instance should be assessed on your Son, and that you have no enjoyed any benefit from the property. This would then ensure that the transfer was exempt from inheritance tax after seven years.

About the Author

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.

Google+

=============================================================

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.