When setting aside money for your grandchildren there are two legal structures available for you: –
– You can set up a bare trust – the funds are formally held in a separate trust entity
– You can set up on an ‘account designate basis’ – the funds are still ‘yours’
The funds that you have set aside are currently set up on an ‘account designate’ basis.
This article deals with the differences between the two structures; the benefits and the drawbacks associated with each option. And we invite you to consider whether it is more appropriate for the investments to be regarded as a bare trust arrangement.
Under an ‘Account Designate’ the minor grandchild has no rights until you say so. This means that you get to choose when they receive the money, and indeed you even retain discretion to change the beneficiary. However, as the investment remains in your name, the tax responsibilities are yours.
HMRC are increasingly taking the view that, in the absence of any clear evidence that the money irrevocably belongs to the grandchildren, it will form part of your estate and therefore included in any IHT calculation.
Under the Bare Trust arrangement, you are acting as a trustee of their money – until such time as they reach 18, and at that point the money is legally theirs for them to do with as they so please. Whilst this may seem an unwelcome restriction on the flexibility that you wish to retain, there are clear tax advantages.
Inheritance Tax – A Potentially Exempt Transfer (PET) or exempt under the ‘normal out of income’ rules
Capital Gains Tax – The beneficiary is assessable on their share of any capital gains made and each will have a full annual exempt amount to use on disposal.
Income Tax – Income tax liability will fall on the beneficiary who will have their own individual personal allowance to use.
You do not necessarily need to draw up a specific trust deed to create a bare trust. What is required is that the gifts to the grandchildren were made with the clear intention to make an irrevocable gift and that you do not wish to retain any rights of access to the funds or the discretion to change the beneficiary.
There only needs to be clear evidence that it was indeed your intention to create a bare trust arrangement.
Please contact us if you have any queries on this subject.