How to invest income from property owned in bare trust

AA-Audrey

My children will soon each own a property which has been put in a bare trust for them (from grandparent). My partner and I will be the trustees.
I am a little confused about how we invest the rental income. The solicitor said we should just open separate (investment/cash) accounts designated for our children but in our names. Is this so? (And if so do I simply ignore them re possible taxable interest on my tax return as they are not really mine) Personally I would prefer to put the rental income into their s&s isa. Is this allowed? We would need an everyday account to be used for property repairs and (possibly) tax if they earn over the threshold in a given year. Again can this simply be a separate savings account in my name?
Finally, if their gross income is less than their tax allowance (which it will for the foreseeable future), do I need to complete a tax return for them?

Malthusian

I am a little confused about how we invest the rental income. The solicitor said we should just open separate (investment/cash) accounts designated for our children but in our names. Is this so?  (And if so do I simply ignore them re possible taxable interest on my tax return as they are not really mine)

Yes, that's a common arrangement for bare trusts.

Personally I would prefer to put the rental income into their s&s isa. Is this allowed?

No, unless you live in Scotland. (I'm assuming they are minors?) Under English/Welsh/NI law you are responsible for the investments until 18. Junior ISAs pass control of the investments to the child at 16 (although they cannot withdraw until 18). Trustees cannot delegate their responsibilities to minors.

You've said there isn't any tax to save via an ISA anyway.

A single property is a very high risk and illiquid investment - have the trustees considered selling the properties and spreading their funds more widely?

Finally, if their gross income is less than their tax allowance (which it will for the foreseeable future), do I need to complete a tax return for them?

They may need to do Self Assessment if their rental income is over 2.5k after expenses or 10k before. (The vague "may" is as per HMRC's own information.)

(Yet another complication of property investment - for passive investment income the threshold is a simple 10kpa.)

Bear in mind that both trusts need to be registered on the new HMRC register. (Although your solicitor should have already informed you of that and probably offered to charge a fee to handle it for you.)

Keep_pedalling

Why properties? Not only a total pain to manage unless you are already experienced landlords, but your children have lost their first time buyer status before they are old enough to buy a property in their own name.

xylophone

No, unless you live in Scotland. (I'm assuming they are minors?) Under English/Welsh/NI law you are responsible for the investments until 18. Junior ISAs pass control of the investments to the child at 16 (although they cannot withdraw until 18). Trustees cannot delegate their responsibilities to minors.

It appears to be the case that each child is now the beneficial owner  of a property gifted by a grand parent.

The parents of the children are only the bare Trustees.

All income arising from the properties belongs to the children and is taxable on them.

Each child has his own personal allowance and capitals gains allowance.

The Trustees must pass all income (after allowable expenses) to the children to whom it belongs.

it seems to me that they would have the right to transfer income to the children's JISAs.

They can check this with their solicitor.

AA-Audrey

It appears to be the case that each child is now the beneficial owner  of a property gifted by a grand parent.

The parents of the children are only the bare Trustees.

All income arising from the properties belongs to the children and is taxable on them.

Each child has his own personal allowance and capitals gains allowance.

The Trustees must pass all income (after allowable expenses) to the children to whom it belongs.

it seems to me that they would have the right to transfer income to the children's JISAs.

They can check this with their solicitor.

This summarises the situation perfectly. We have/had no say in the gifts but only in how they are managed (which could include selling at some point before 18) For now, each child will own a house and we will manage and invest the rental income for them. True, they will lose first time buyer status but they will have a house (and, yes, capital gains tax bill). What more do they want?! (That’s a joke) The Key thing is we keep records to show how we spent and invested the rental money.

I’ve asked their JISA provider who say it is fine to deposit there but I will clarify with a solicitor. I will also clarify with HMRC

My last question is in relation to using the money before 18. I know, unlike JISAs that we as trustees can access and use money in a bare trust for their maintenance or benefit. I know this could include school fees, but could it include nursery fees? 

Thanks 

xylophone

I know this could include school fees, but could it include nursery fees? 

Your solicitor will advise.

It seems to me  (no expert) that the key is that the income  must be used for the benefit of the child to whom it belongs.

If the nursery is regarded as benefiting the child, then it seems to me that this would be a legitimate use of  rental income arising from his property.

The fact that it would also benefit the parents  who would otherwise pay the nursery  fees seems to me no argument  because the same could be said of using the money for school fees/riding lessons/  music lessons/ school trips etc.

All income and expenditure relating to the properties must be carefully documented as the children will have the right to request a full accounting when they reach their majority - HMRC could also demand to see records at any time.

It seems to me that it would be wise to set up a  Trustee current account for each child's trust- this would accept the income from each tenant and provide a means of making outgoing payments for the maintenance of the property and to JISA/other accounts to be held by the Trustees in the name of each child.

It would be wise to approach your bank with regard to opening the accounts - some banks are reluctant to open them but  you could try Barclays/Metro Bank/Cater Allen.

xylophone

https://www.weatherbys.bank/insights/new-trust-rules/

https://techzone.abrdn.com/public/iht-est-plan/Prac-guide-gifting-child-grand

may be worth a read.

Malthusian

xylophone said:

The Trustees must pass all income (after allowable expenses) to the children to whom it belongs.

it seems to me that they would have the right to transfer income to the children's JISAs.

They can check this with their solicitor.

My understanding is that the income from the trust is still part of the trust, meaning the trustees are still responsible for what happens to it until the child turns 18 (assuming we're not in Scotland).

The likelihood of the child switching the accumulated income from the trust into unicorn farms at 16 and then suing the trustees is so remote that I wouldn't argue the toss with the solicitor if they say it's probably fine to put it in a JISA.

In the field of trust law it falls into the very large paddock of "things you will probably get away with".

AA-Audrey said:
This summarises the situation perfectly. We have/had no say in the gifts but only in how they are managed (which could include selling at some point before 18) For now, each child will own a house and we will manage and invest the rental income for them. True, they will lose first time buyer status but they will have a house (and, yes, capital gains tax bill). What more do they want?! (That’s a joke)

Diversification and liquidity, and some extra quality time with their parents that would otherwise have been spent faffing around dealing with tenants and maintenance?

The grandparent really should have considered selling the property in his own name and gifting the cash to the grandchildren, as losing first time buyer status is likely to cost them a lot of money in future (up to £5,000 a piece at current Eng/NI rates) for no real gain. But unfortunately that's spilt milk.

AA-Audrey

Thanks Malthusian 
I agree with diversification (to make the most money) but equally, I would be happy for them to own an asset (which they would have to sell to release any money) rather than inherit what would be a huge amount of money at 18. They should have enough to pay uni fees and capital gains tax. A balanced approach I hope.

thanks for all your help!

The allowable uses for the rental income seems I’ll defined. The solicitor said as much. I’ll keep records of every penny.


 

Malthusian

AA-Audrey said:

Thanks Malthusian 
I agree with diversification (to make the most money) but equally, I would be happy for them to own an asset (which they would have to sell to release any money) rather than inherit what would be a huge amount of money at 18. 

The point of diversification is to take less risk, not make more money. If you are going to be property landlords you should be aiming to make more money than you would from a diversified stockmarket investment, otherwise there's no point in all that extra risk and work.
They are going to inherit a huge amount of money at 18 regardless - a huge amount of money is a huge amount of money whatever it's invested in.
Unfortunately, if your children go "off the rails", you will find that having the money tied up in a property will not stop them accessing the money. I recall a story here about someone who arranged for a vulnerable relative who had come into money to buy a home. The hope was that they wouldn't have the wherewithal to sell their own home from underneath themselves. They promptly did exactly that and the proceeds soon disappeared. And that was a property they lived in, not a buy-to-let.
Hopefully this is completely irrelevant to your children - but if it is, the "advantage" of a property's illiquidity isn't an advantage at all.

They should have enough to pay uni fees and capital gains tax.

If they go to uni they should usually get the maximum student loan they can get. As it stands the system works on the basis that only people with income averaging around £60,000pa+ over the 35 years after graduation should be paying the cost of a typical university education in full.

If you are below the threshold, meaning outstanding "student debt" will eventually be written off, declining to take out student loans and paying university fees out of investment income instead is paying voluntary tax.

If the combination of rental income and post-uni earnings is high enough that they will repay any student loans in full, it may make sense not to bother in order to save the interest. But that would take some combination of quite a lot of rental income and a high-earning job. (Bearing in mind that even high earners tend to spend some years climbing the ladder.)

xylophone

The allowable uses for the rental income seems I’ll defined. The solicitor said as much. I’ll keep records of every penny.

How so? Why do you need the use of the child's income defined?

Let us get back to the basic situation.

The children's grandfather has made an outright  and unconditional gift of a property to each of your children.

Each child is therefore the beneficial owner of the property in question but by reason of minority  (it seems that not  only are  your children under 16/18 but are actually infants), may not hold the property in his/her own name .

This does not change the fact that the property/ its rental income/eventual sale proceeds belong to the child.

Such monies must not be paid into the personal accounts of the Trustees but rather into accounts held by John Smith and Mary Smith as Trustees of Jane Smith/Mary Smith/ Robert Smith etc.

I assume that there is some sort of formal Trust Deed - are there any specific requirements?

If not, as Trustees you must act in the best interests of the beneficiary.

See https://www.redmayne.co.uk/RedmayneBentley/media/Redmayne-Bentley/Forms and Brochures/Fact-Sheet-Bare-Trust-FS030.pdf?ext=.pdf

ADVANTAGES OF A BARE TRUST

• Cheaper and easier to establish than other types of trust.

• A trust deed is not always required.

• A bare trust can be used to hold assets for a minor who would be otherwise unable to benefit from owning securities.

• Withdrawals are permitted (unlike a JISA or SIPP), before the beneficiary reaches the age of 18 (16 in Scotland) if they are for the benefit of the beneficiary where written instruction has been received from the trustee(s).

If the Trustees deem it to be to the benefit of a beneficiary that income arising from Trust assets should be contributed to his JISA, then it appears to me that such contributions may be made.