Bare Trusts for child

xylophone

You/wife/daughter are the Trustees for the inheritance of a minor child.
You opened an investment  account  for the Trust.

At the moment the  Trust has only one asset, the holding of shares in SMT.

You decide you want to diversify so give an order to sell half the holding in SMT and buy  eg Witan Investment Trust with the proceeds - now the Trust has two assets, the holding of SMT and the holding of Witan.

You decide that you want to sell half the Witan holding but not reinvest for the moment.

The Trust now has three assets, SMT, Witan and cash.

You decide that you want to use that cash for the benefit of the child, in this case to subscribe to her CTF/ JISA.

There should be no problem with this - the money is moving from an account to which she has the absolute right to access  at the age of 18 to an account where she has the absolute right to access at age 18. 
https://www.hl.co.uk/investment-services/investing-for-children/junior-investment-account
"Withdrawals can be made at any time, although they must be used for the benefit of the child (e.g. to pay school fees)."

ANGLICANPAT

xylophone  thats perfect thank you . I was coming at it from a different  place altogether and thought all the parts of it had to  somehow stay in trust till 18 , but your explanation was great thank you  . Hopefully I can sort it  now .Appreciate your patience !  

xylophone

 I was coming at it from a different  place altogether and thought all the parts of it had to  somehow stay in trust till 18 ,

The account is a  BareTrust account - selling part of the holding in the account and buying another holding or staying in cash within the account does not change the Bare Trust status of the  shares/cash  whose beneficial owner is the child. 

Moving  proceeds of sale of some of the assets out of the Bare Trust to CTF/JISA would not change the beneficial ownership of those assets.

https://www.gov.uk/guidance/junior-individual-savings-accounts-for-managers-jisas-terms-and-conditions

ANGLICANPAT

Thank you xylophone -  its slowly sinking in to the old grey matter.  It seems the CGT I was pondering about   wont be applicable if   the  money from selling  SMT doesnt leave the trust fund and is used  just  to buy a new investment .  Presumably  though  if I choose to move £18k out to a bank CTF/jisa ,  even in childs name and for their benefit , that part would  be subject to CGT  .  Is that worked out by  taking the present complete balance, deducting the original capital put in , ie £51k-£15 = £36k then  taxing whatever  proportion  of it the £18k being removed represents ,( minus the childs allowance)? 

bowlhead99

ANGLICANPAT said:

Thank you xylophone -  its slowly sinking in to the old grey matter.  It seems the CGT I was pondering about   wont be applicable if   the  money from selling  SMT doesnt leave the trust fund and is used  just  to buy a new investment .  Presumably  though  if I choose to move £18k out to a bank CTF/jisa ,  even in childs name and for their benefit , that part would  be subject to CGT  .  Is that worked out by  taking the present complete balance, deducting the original capital put in , ie £51k-£15 = £36k then  taxing whatever  proportion  of it the £18k being removed represents ,( minus the childs allowance)? 

You have that wrong. It's not the case that a capital gain exists or doesn't exist just because the money leaves or doesn't leave the bare trust account. 

If you cash it all in (e.g. sell assets that cost 15k in the past, for 50k now), a gain of 35k has been made. The fact that 35k realised capital gain has been made is not ignored just because that money is spent on buying more assets inside the bare trust.

Whatever is done with the proceeds, is being done *after* a gain has been made, and the gain will be taxable (subject to exemptions and tax rates). If you move the proceeds to a different bank account ,or a CTF or a JISA, those are things that can affect the treatment of *future* taxable events (e.g. gains made inside JISAs and CTFs aren't ever taxable), but whether you move the proceeds to those other accounts - or just leave the proceeds in situ and buy more assets - they are things happening after a gain on selling SMT has already been realised, so such decisions don't affect the gain that you created by selling the assets.

The investment is held in bare trust for the child. So it's the child's investment, even though in legal terms you are holding it on the child's behalf. If the investment is sold for more than was paid for it, a gain will be made, which is potentially taxable on the child if it is not covered by the child's annual exemption. Whether the money later leaves the trust fund or not is irrelevant to whether or not the child made a gain, because at the moment the SMT shares are not inside any special tax-exempt wrapper.  The trust's "bare" status means that 'the trust itself' is not a separately taxable person - the beneficiary is already known, and it's the child, and they are the beneficial owner right now -so if a gain is made in an account owned by the trust, then the gain is effectively being made by the child, in real time.

If you sell £50k of SMT stock that cost £15k to buy originally, a £35k gain will be made. At current prices, the £15k cost is 30% of the proceeds and so the gain is going to be 70% of the sales proceeds.  You can see that the £35k gain created by selling the whole pile of shares for £50k sales proceeds, represents 70% of the £50k proceeds.  If you only sell some fraction of the shares and the other shares remain unsold, then the gain is only assessed on that portion which is sold, and not on what remains unsold.  So for example, if you sell £18k of stock, 30% of the £18k will be cost and 70% of the £18k will be gain, which is £12.6k.  That gain is larger than the child's £12.3k annual CGT exemption for 2020/21 so you might prefer to sell fewer shares and avoid triggering a small tax charge.

The other way to prove out the same calculation is to say that the whole sale of £50k would be generating a £35k gain, so if you only sold a little over a third of the shares (36% of the shares is £18k) you would only make a little over a third of the gain that you'd have made if selling them all (36% of the potential £35k gain is £12.6k gain made).

It's perfectly valid to cash out £18k-worth of SMT shares to get £18k of cash, and then invest that cash in other things - such as making a CTF or JISA investment - but it will generate slightly more gain than the child's available CGT exemption for the current year, so there will be a small amount of tax to pay (though exceeding the CGT exemption by £300 will only result in £30 of tax, which is not much of a hardship).   

But importantly, whether you choose to invest the resulting £18k cash in CTFs or JISAs or move it to some other bank account for the child, tor do something else with it: the gain has been made as soon as you sell that amount of shares for more than was paid for them. And likewise if you choose to simply reinvest it in some other asset in the bare trust's same account at HL, and not take it off into another account, the gain has still been made.

As you realise that the child's bare trust currently has a lot more invested in SMT than you expected, it makes sense to 'de-risk' and sell some of the investment, but if you sell as much as £18k out of £50k of it, the child is going to make a gain bigger than their annual exemption.  However, tax should not be feared. Say you sell half the shares (£25k worth, which had originally cost £7.5k) and make £17.5k of realised capital gains, which exceeds the annual exemption by £5.2k (the exemption being  £12.3k). This will trigger a tax charge of £520 for the child, which can be paid for out of some of the sales proceeds. You would rather not have any tax at all. However, if you had instead hung on to that £25k of relatively high risk and volatile SMT shares, and they drop in value by 20% more than some alternative investment or cash deposit would have dropped (20% x £25k = £5k), the loss in value is about ten times as much as the £520 tax bill would have been.

ANGLICANPAT

I am very grateful for the detailed info  bowlhead.   I think I may have been reading some of the tax stuff perhaps out of context . after strugging with pages and pages of the Govt website  and finding -for me, confusing info   . One part I latched to said  

"If assets are taken out of a trust

The trustees usually have to pay the tax if they sell or transfer assets on behalf of the beneficiary.

There’s no tax to pay in bare trusts if the assets are transferred to the beneficiary."

----and Ive  interpreted  it as relevent to the SMT  situation  we've got   but  obviously wrongly.  

Thank you so much for your imput, its a huge help to me in deciding which way to jump with this fund.  .  

xylophone

You indicate the the shares in SMT were purchased at different times and (presumably) the share price at the time of purchase differed.
https://www.gov.uk/tax-sell-shares/work-out-your-gain

There are special rules for working out the cost of your shares if you sell:

• shares you bought at different times and prices in one company

ANGLICANPAT

Thanks xylophone.   I   read  about that bit  somewhere .  Think probably  will get  the tax sorted by a tax advisor  after the end of this year , then Ill be sure there's no errors  . This number stuff is  not a good fit with my non mathmatical brain !  Great that  between you and bowlhead  Ive been able to see the way forward regards the immediate  investing  and thats invaluable ..