Unit Trust for grandchildren and CGT

When a financial account is owned jointly by multiple individuals (rather than being a trust controlled by those people as trustees for some other beneficiary), there is a general assumption that the contents of the account belong to the person/ people who have funded the account in the proportions in which they contributed.

An exception is where the joint accountholders of the financial account are spouses. In that case, in absence of an agreement to the contrary, they are considered to jointly own the account contents in equal shares regardless of which of them funded the account.

You don't mention if the parents are spouses. And you don't mention whether the grandparents are spouses, or if they are not spouses (e.g. never married, married then divorced, or unrelated such as being from opposite sides of the family tree).

In your OP, you mention "The grandparent" (singular) has funded £25k over the years. So the most likely scenarios are:

a) if the two grandparents are spouses, then when Grandparent One put £25k into the account over the years, that money in the joint financial account shared with his wife (or her husband) will jointly belong to that husband and wife pair even though it might have only been physically contributed into the account by one or the other of them. As such, they are joint owners of the investment with a £25k cost (£12.5k each) which is now worth £42k (£21k each). The two parents are also joint owners of the account but their financial interest in it is each £0 as they have never put any money into the account.

b) if the two grandparents are not spouses then when Grandparent One puts their £25k into an account that they jointly own, and nobody else puts any money in, it still belongs to the Grandparent One. Grandparent Two does not have any economic interest in it as they never contributed anything, and likewise Parent One and Parent Two do not have any economic interest in it either because they never contributed anything either. So the investment which is now worth £42k and had cost £25k is still beneficially owned by Grandparent One, the only contributor.

A third scenario which is unlikely to be the case in the absence of any documented agreements over the years is:

c) every time Grandparent One made a contribution to the account, it was intended as 25% deposit for his own benefit and 75% of it was a gift in equal shares to the other three account owners, with the result that they own all the money equally between the four of them. I expect this is unlikely to be the case, because the purpose of the account is to set aside some money which will ultimately be gifted to the grandchild in due course, and it's unlikely that the intention was to gift it to the other three parties just so that they could ultimately re-gift the money to the grandchild.

So, going back to the likely scenarios (a) and (b):

In (a), where I imagined that Grandparents One and Two were spouses, they have a unit trust standing at the value of £42k which they had bought for £25k. In order to realise £40k of cash, 40/42ths of the units in the unit trust (a little over 95% of them) will need to be sold. This means that what was sold has cash proceeds of £40k, and related costs of 40/42ths of the £25k purchase price (~£23,800). The grandparents have realised a capital gain of (£40,000 - £23,800) or £16,200.

As they jointly own the assets and the gain in scenario (a), the £16200 realised capital gain is split down the middle as £8100 each. If each of them hasn't had any other gains this tax year, they will not have used their £11,700 capital gains annual exemptions, and so can use £8,100 of their annual exemption against the gains on this disposal, leaving no gain remaining to be taxable (and still each have £3600 of unused annual exemption for any other disposals that tax year).

Under scenario (b), Grandparent One is not the spouse of Grandparent Two. And so, as all the money in the joint account was contributed by Grandparent One, and not by Grandparent Two, Parent One or Parent Two, the beneficial ownership of the contents of the account sits with Grandparent One. When it's decided that £40,000-worth of the £42,000 asset will be sold, you'd record £40,000 of proceeds with a cost of 40/42ths of £25,000, i.e. £23800. So Grandparent One makes a capital gain of £40000-23800 which is £16200 as you'll remember from the other example.

But here, Grandparent One is the only person with a beneficial interest in the asset and so is allocated all the gain. If he/she has not made any other capital gains in 2017/18 then he/she will have £11700 of annual exemption to set against the £16200 of gain. The last £4500 will not be exempt and CGT will be due. The relevant CGT rate to be charged on the £4500 of gain is 10% if they are usually a basic rate taxpayer and the gain doesn't tip them into higher rate tax; or 20% if they are a higher or additional rate taxpayer.

Note that in neither of the scenarios is the CGT payable contingent on to whom you write the cheques, or how many cheques are written. But if the two parents are not using their £20k ISA allowances for anything else, it can be an OK solution as (i) you know there will be no income tax on the interest that is earned over the periods that their ISAs are running, and (ii) by giving it to the parents for their own personal ISAs rather than putting it in a bank account for the child, the parents will be able to best determine when to give it to the child.

At the time that the £40k is paid over to the two parents to put into their personal ISAs it would be considered a gift from Grandparent One (scenario b) or a joint gift from Grandparents One and Two (scenario a) to those two individuals, for the purposes of inheritance tax calculations further down the line, should that be relevant.

- - -

That's the simple version.

Unfortunately, to make the CGT calc more complicated...

You told us that the grandparent had invested £25,000 over the years. Is this the amount contributed in total by the grandparent, or does it include the value of any dividend/interest income generated in the unit trust and reinvested? If it does not include that reinvestment, be aware that value of income reinvested over the years can be added onto the grandparent' original cash cost of the units in the unit trust, when considering the 'cost' of the units to be set againt the sale proceeds of the units.

Say for example £25k was invested originally by the grandparent putting in money over time, and £2100 of income was made over the years and put back into the investment. When you look at the relevant cost to be set against the £40k of proceeds in your gains calculation, it is 40/42ths of £25k cash (£23800) and and 40/42ths of £2100 dividend/interest reinvestment (£2000) so you actually have a total cost of £25800 instead of £23800 to set against your £40000 proceeds. Lower gain, lower tax (if relevant). Not so relevant if the investment is split between multiple people and all covered by annual exemption anyway.

For clarity, it doesn't matter whether the income was physically received in the joint account and reinvested, or was internally reinvested by the unit trust manager inside the unit trust with no distributions actually made because you held 'accumulation' units. There would inevitably have been some income generated over time, and presumably you haven't received distributions from the unit trust into the joint account and taken them away and spent them on other stuff. So, there is likely to be some income that got reinvested which you can count as 'investment cost'.

The other implication of this is that the person that you determine is the beneficial owner of the £42k investment (whether Grandparent One, or Grandparent One and Grandparent Two jointly) will have been earning investment income over the course of the investment lifetime and should make sure they have paid all their income taxes due in the relevant years. Although there may not have been any tax due on that, depending on their personal tax position at the time.

riccyboy wrote: »

So if it is a designated account, will any CGT be borne equally by all 4 owners (with each having their £11,700 CGT allowance to use against it)?

No, the money in the joint account will belong to whomever funded the account (as described in my post above, which you might not have seen if you were busy replying to xylophone). If the parents never put anything in the account, then they don't have any % share of the account or the cost base of the investment, unless the person funding the account had formally gifted it to them. So they don't make any gains.

The fact that the account carries a funny name or designation to remind the accountholders what they intend to do with it in the future, does not change the tax position from it being a normal joint account.

If it's a bare trust, do the rules permit a withdrawal to be paid to two of the account owners who will set up a fixed rate cash ISA with the proceeds (for the benefit of the child in a few years time)?

No, because in that case the money in the unit trust belongs beneficially to the child as the exclusive beneficial owner, who presumably does not want it put into two Individual Savings Accounts belonging to their parents instead of an account belonging to themselves (which might even pay a higher rate of interest).

So, the rules do not permit the trustees (if that's what the parents and grandparents all are, in the context of the trust), to just give the money to the parents to save for themselves in their own name in non-trust accounts and then gift it to the child later. The money is already the child's money.

However, if the money is given to a parent of the minor to whom the funds belong, to still be held as a bare trust, the parent may use their discretionary powers under The Trustee Act 1925 to use the funds under their management for maintenance and education or benefit of the child. Even if there is (a) any other fund applicable to the same purpose; or (b) any person bound by law to provide for her maintenance or education.

So if it is a trust already, then the money can be given to the parents to either put in another trust (trust investment account or savings / current account in child's name), or to spend on things the child needs. But it shouldn't be given to the parents just to dump into their own account (whether fixed deposit or otherwise).