Bare trust income tax

mja12

Dear All,


Any advice would be greatly appreciated. I am reading conflicting answers. Looking to save modest amounts for 2 year old - £1000 lump sum then £50/month. Looking at an investment fund based on long-term plan that I believe will outperform cash. I understand the tax benefits of a junior isa but the lack of flexibility should we need the money at an earlier point is a concern. Therefore, considering bare trust.


Is the £100 income taxed to the higher rate parent or can it be designated to a named parent whose tax rate is lower (I am higher rate, wife is just over taxable threshold (may drop below next year or two). If it is I who is taxes I cannot see how a junior isa can be bettered even accounting the loss of flexibility.


Many thanks

kidmugsy

If you scroll down to p50
http://www.theaic.co.uk/sites/default/files/statistics/attachment/AICStats30Jun14.pdf
you'll see that lots of Investment Companies offer bare trust investment schemes for children. Their literature will explain.

Your_Hero

mja12 wrote: »

Dear All,

Any advice would be greatly appreciated. I am reading conflicting answers. Looking to save modest amounts for 2 year old - £1000 lump sum then £50/month. Looking at an investment fund based on long-term plan that I believe will outperform cash. I understand the tax benefits of a junior isa but the lack of flexibility should we need the money at an earlier point is a concern. Therefore, considering bare trust.

Is the £100 income taxed to the higher rate parent or can it be designated to a named parent whose tax rate is lower (I am higher rate, wife is just over taxable threshold (may drop below next year or two). If it is I who is taxes I cannot see how a junior isa can be bettered even accounting the loss of flexibility.

Many thanks

I don't understand your point about flexibility. The child will become legally entitled to the proceeds at 18 (England) and no sooner just like an ISA. How can you access it at an earlier point using a bare trust?

If interest exceeds £100 per annum, this will be charged to the Settlor of the trust, whoever that is. So if it your wife who is the settlor, then it will be her who will need to declare the interest earned. This is slightly different for investment based trusts, since you don't earn interest.

xylophone

Income from a bare trust is taxable on the beneficiary but where the parent is the settlor see

http://www.hmrc.gov.uk/trusts/types/minors.htm

The child is still the beneficial owners of the money/assets and still has the absolute right to access and control at the age of 18 (16 in Scotland).

It would be possible for you to give money to your wife and for her to give it to the child so that any tax would be payable at her highest marginal rate.

mja12

Your_Hero wrote: »

I don't understand your point about flexibility. The child will become legally entitled to the proceeds at 18 (England) and no sooner just like an ISA. How can you access it at an earlier point using a bare trust?

If interest exceeds £100 per annum, this will be charged to the Settlor of the trust, whoever that is. So if it your wife who is the settlor, then it will be her who will need to declare the interest earned. This is slightly different for investment based trusts, since you don't earn interest.

Many thanks for all the advice.


I understand that with a bare trust funds can be accessed before the child is 18 if it is in the interest of the child - eg, severe injury requiring house modifications or even school fees. This is not possible with a junior isa.

xylophone

I understand that with a bare trust funds can be accessed before the child is 18 if it is in the interest of the child - eg, severe injury requiring house modifications or even school fees.

http://www.aviva-for-advisers.co.uk/adviser/site/public/tech-centre/tech-article-detail/bare-trusts-for-minors---inheritance-tax
might be of interest.

Your_Hero

mja12 wrote: »

Many thanks for all the advice.

I understand that with a bare trust funds can be accessed before the child is 18 if it is in the interest of the child - eg, severe injury requiring house modifications or even school fees. This is not possible with a junior isa.

Junior ISAs do allow early access for terminal illness:

6. If your child is terminally ill or dies
The registered contact can take money out of a Junior ISA early if a child’s terminally ill.
‘Terminally ill’ means that the child has a disease or illness that is going to get worse and isn’t expected to live more than 6 months.https://www.gov.uk/junior-individual-savings-accounts/if-your-child-is-terminally-ill-or-dies


A bare trust may also allow this, but would depend on trust wording etc.

To my knowledge, generally speaking neither the junior ISA nor the bare trust (in its simple form for gift purposes) can release funds for home modifications or school fees, or injuries. The trustees have no discretion at all on this - they only hold the assets by legal title and nothing else. The beneficiaries make a claim for the proceeds at 18 same as an ISA.

Please show/tell me why you would think otherwise?

mja12

Your_Hero wrote: »

Junior ISAs do allow early access for terminal illness:

6. If your child is terminally ill or dies
The registered contact can take money out of a Junior ISA early if a child’s terminally ill.
‘Terminally ill’ means that the child has a disease or illness that is going to get worse and isn’t expected to live more than 6 months.https://www.gov.uk/junior-individual-savings-accounts/if-your-child-is-terminally-ill-or-dies


A bare trust may also allow this, but would depend on trust wording etc.

To my knowledge, generally speaking neither the junior ISA nor the bare trust (in its simple form for gift purposes) can release funds for home modifications or school fees, or injuries. The trustees have no discretion at all on this - they only hold the assets by legal title and nothing else. The beneficiaries make a claim for the proceeds at 18 same as an ISA.

Please show/tell me why you would think otherwise?

Thanks Stalwart.
It was advice from an introductory meeting I had with an IFA and further info found on the internet, including:

Bare Trusts - are arrangements where trustees are acting really only as nominees, with the beneficiaries having beneficial ownership of the monies. Where funds are provided by grandparents, grandchildren can use their personal allowances for Income Tax and annual exemptions for CGT, which is likely to be better than if the monies were held by the parents or grandparents. If the funds are provided by parents, however, income tax is assessed on them until the children reach eighteen.
A disadvantage is that at eighteen the children can call for the money which belongs to them; because it might be spent unwisely does perhaps mean that such trusts should not be over funded, to leave an eighteen year old with too much to spend. Whilst they are under eighteen, the monies can be used freely for their benefit, including paying school fees.

And from an article in the Telegraph:
Danny Cox, head of financial planning at Hargreaves Lansdown...............Bare trusts are the simplest type of trusts and the child becomes automatically entitled to the investments at 18, but the trustee can distribute money earlier for the child's benefit if they need to, perhaps to meet school fees. For tax purposes the account belongs to the child and is simply administered by the trustee.

Also, http://www.ft.com/cms/s/2/18561400-b1ef-11df-b2d9-00144feabdc0.html#axzz38qPU4iAE

Please let me know if I people feel this information is inaccurate or I have misinterpreted.

Your_Hero

mja12 wrote: »

Thanks Stalwart.
It was advice from an introductory meeting I had with an IFA and further info found on the internet, including:

Bare Trusts - are arrangements where trustees are acting really only as nominees, with the beneficiaries having beneficial ownership of the monies. Where funds are provided by grandparents, grandchildren can use their personal allowances for Income Tax and annual exemptions for CGT, which is likely to be better than if the monies were held by the parents or grandparents. If the funds are provided by parents, however, income tax is assessed on them until the children reach eighteen.
A disadvantage is that at eighteen the children can call for the money which belongs to them; because it might be spent unwisely does perhaps mean that such trusts should not be over funded, to leave an eighteen year old with too much to spend. Whilst they are under eighteen, the monies can be used freely for their benefit, including paying school fees.

And from an article in the Telegraph:
Danny Cox, head of financial planning at Hargreaves Lansdown...............Bare trusts are the simplest type of trusts and the child becomes automatically entitled to the investments at 18, but the trustee can distribute money earlier for the child's benefit if they need to, perhaps to meet school fees. For tax purposes the account belongs to the child and is simply administered by the trustee.

Also, http://www.ft.com/cms/s/2/18561400-b1ef-11df-b2d9-00144feabdc0.html#axzz38qPU4iAE

Please let me know if I people feel this information is inaccurate or I have misinterpreted.

I have looked into this. Danny Cox is referring to HL's share account for minors which is a designated account for children. Although in their "Guide for investing for children" they tend to use the terms interchangeably, they are in fact quite different.

Please see here, previously discussed:
https://forums.moneysavingexpert.com/discussion/3124028

And page 17: http://bailliegifford.com/documentgateway.aspx?_id=3A39B056-DE6E-474E-870C-3DB1B9BB88F3&disclaimer=ok

Designated account

• Children can’t hold shares in their own name until they
  reach age 18 (16 in Scotland). A designated plan means
  the funds are held in your name, but designated as an
  account for the child.
• The main benefit of this is that you’re able to keep
  control of the investment, and have access to the money
  before the child reaches 18 – so you can decide when
  the child should receive the proceeds and whether they
  should have it all at once, or in stages. This flexibility
  means you can use it to meet the cost of day-to-day
  expenses, such as school fees, sports equipment or
  extracurricular activities.
• When your child reaches 18, you can transfer the plan
  into their name or keep it in your name if you wish. You can also close the plan at any time.
• The downsides to this option are that the investment
  is considered to belong to the adult for tax purposes.
  This means that income and capital gains will be taxed
  at your highest marginal rate and the investment will
  be considered part of your estate for inheritance tax
  purposes if you die while you still hold the investment in
  your name.
  
  Bare trust

• You can also set up a children’s investment plan as a
  bare trust, making it more tax-efficient. In this case, the
  plan is held by trustees on behalf of the child and the
  investment is treated as the child’s own for income and
  capital gains tax purposes.
• This is particularly useful if you’re likely to be making full
  use of your own capital gains tax allowance or if you’re a
  higher-rate taxpayer.
• Another benefit is that the investment is treated as a
  potentially-exempt transfer for inheritance tax purposes.
• This means that as long as you live for at least seven
  years after you make the investment on behalf of
  the child, it will not be liable to inheritance tax on
  your death.
• On the downside, you will not be able to access the
  investment: trustees relinquish control when the child
  turns 18 (16 in Scotland), and once a trust is set up it
  can’t be revoked.

Summary: http://www.bgchildsavings.com/pages/how_to_invest.aspx

xylophone

From SIT bare Trust FAQ http://www.sit.co.uk/products/investing_for_children/features/questions_and_answers/

"Bare trust
If the plan is set up as a bare trust, the investment cannot be sold until the child reaches the age of majority other than at the discretion of the trustees, for purposes listed in the terms of the bare trust. Sale instructions must be given by the trustees jointly and in writing."

mja12

Your_Hero wrote: »

I have looked into this. Danny Cox is referring to HL's share account for minors which is a designated account for children. Although in their "Guide for investing for children" they tend to use the terms interchangeably, they are in fact quite different.

Please see here, previously discussed:
https://forums.moneysavingexpert.com/discussion/3124028

And page 17: http://bailliegifford.com/documentgateway.aspx?_id=3A39B056-DE6E-474E-870C-3DB1B9BB88F3&disclaimer=ok

Designated account

• Children can’t hold shares in their own name until they
  reach age 18 (16 in Scotland). A designated plan means
  the funds are held in your name, but designated as an
  account for the child.
• The main benefit of this is that you’re able to keep
  control of the investment, and have access to the money
  before the child reaches 18 – so you can decide when
  the child should receive the proceeds and whether they
  should have it all at once, or in stages. This flexibility
  means you can use it to meet the cost of day-to-day
  expenses, such as school fees, sports equipment or
  extracurricular activities.
• When your child reaches 18, you can transfer the plan
  into their name or keep it in your name if you wish. You can also close the plan at any time.
• The downsides to this option are that the investment
  is considered to belong to the adult for tax purposes.
  This means that income and capital gains will be taxed
  at your highest marginal rate and the investment will
  be considered part of your estate for inheritance tax
  purposes if you die while you still hold the investment in
  your name.
  
  Bare trust

• You can also set up a children’s investment plan as a
  bare trust, making it more tax-efficient. In this case, the
  plan is held by trustees on behalf of the child and the
  investment is treated as the child’s own for income and
  capital gains tax purposes.
• This is particularly useful if you’re likely to be making full
  use of your own capital gains tax allowance or if you’re a
  higher-rate taxpayer.
• Another benefit is that the investment is treated as a
  potentially-exempt transfer for inheritance tax purposes.
• This means that as long as you live for at least seven
  years after you make the investment on behalf of
  the child, it will not be liable to inheritance tax on
  your death.
• On the downside, you will not be able to access the
  investment: trustees relinquish control when the child
  turns 18 (16 in Scotland), and once a trust is set up it
  can’t be revoked.

Summary: http://www.bgchildsavings.com/pages/how_to_invest.aspx

Been a while but just to follow up. I spoke to HL and they did indeed tell me that a bare trust and designated account as far as they are concerned are synonymous but as you say there are differences.

I have an individual investment fund with HL that I want to place in bare trust. HL tell me the only way is to transfer the fund into their designated account and then complete a bare trust form. This will incur a £12.50 transfer fee.

My question is - can I not just complete the bare trust form for my existing account and write to HMRC to inform them of the action to establish the trust or will this leave me open to future challenges? I found this post on the internet http://www.candidmoney.com/askjustin/760/can-i-setup-bare-trust-myself - would people agree?


Many thanks.