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    • riccyboy
    • By riccyboy 10th Aug 18, 7:41 PM
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    riccyboy
    Unit Trust for grandchildren and CGT
    • #1
    • 10th Aug 18, 7:41 PM
    Unit Trust for grandchildren and CGT 10th Aug 18 at 7:41 PM
    Hi. Can someone please explain the CGT implication of the following Unit Trust set-up please:

    - A designated Unit Trust account (accumulated) was set up for a grandchild
    - There are 4 joint owners of the account (two grandparents and the two parents)
    - The grandparent has invested £25,000 in total over 10 years
    - The account is now worth £42,000

    If I encash £40000 (with £20000 paid by cheque to each of the two parents - to protect the money for the grandchild by putting it into 2 fixed rate cash ISAs) who pays CGT and what CGT allowances are applicable?

    Many thanks for your help.
Page 1
    • xylophone
    • By xylophone 10th Aug 18, 9:41 PM
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    xylophone
    • #2
    • 10th Aug 18, 9:41 PM
    • #2
    • 10th Aug 18, 9:41 PM
    Can we be clear that this was merely a "designated" account (not a bare trust)?

    https://forums.moneysavingexpert.com/showthread.php?t=5091712

    If it is not a bare trust and the account stands in the name of four adults (even if there is a designation signifying the possibility of a gift in the future), then presumably the CGT falls on the four adults?

    If it is actually a bare trust then the CGT liability falls on the child beneficiary.

    http://candidmoney-com.blogspot.com/2013/02/difference-between-designated-accounts.html

    https://www.taxinsider.co.uk/763-The_Bare_Essentials_Bare_Trusts.html
    • bowlhead99
    • By bowlhead99 10th Aug 18, 10:37 PM
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    bowlhead99
    • #3
    • 10th Aug 18, 10:37 PM
    • #3
    • 10th Aug 18, 10:37 PM
    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.
    Last edited by bowlhead99; 10-08-2018 at 10:41 PM.
    • riccyboy
    • By riccyboy 10th Aug 18, 10:53 PM
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    riccyboy
    • #4
    • 10th Aug 18, 10:53 PM
    • #4
    • 10th Aug 18, 10:53 PM
    Many thanks that's useful stuff. I'm not sure if it's a bare trust or designated - the Unit Trust account has the initials of the grandchild at the end and there are no restrictions by the provider on withdrawing the £40,000 (which makes me think it isn't a bare trust). 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)?

    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)?
    • riccyboy
    • By riccyboy 10th Aug 18, 11:03 PM
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    riccyboy
    • #5
    • 10th Aug 18, 11:03 PM
    • #5
    • 10th Aug 18, 11:03 PM
    Also many thanks bowlhead99, that's a great response (I posted my reply before seeing your entry). Any comments on my post re bare trust would be greatly appreciated.
    • xylophone
    • By xylophone 10th Aug 18, 11:15 PM
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    xylophone
    • #6
    • 10th Aug 18, 11:15 PM
    • #6
    • 10th Aug 18, 11:15 PM
    they are considered to jointly own the account contents in equal shares regardless of which of them funded the account.
    Or it would be possible for the money contributed by just one individual to a joint account to be a "gift" to the other parties (on the basis that any one of them could withdraw money from the account)?

    I say this on the basis that it appears from the first post that just one of the parties can give instructions to sell units and can pass the cash to another two of the parties?
    • bowlhead99
    • By bowlhead99 10th Aug 18, 11:16 PM
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    bowlhead99
    • #7
    • 10th Aug 18, 11:16 PM
    • #7
    • 10th Aug 18, 11:16 PM
    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)?
    Originally posted by riccyboy
    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).
    • xylophone
    • By xylophone 10th Aug 18, 11:18 PM
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    xylophone
    • #8
    • 10th Aug 18, 11:18 PM
    • #8
    • 10th Aug 18, 11:18 PM
    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)?
    If it is a bare trust then the child is the beneficial owner of the asset and the cash cannot be passed to the parents for them to hold in their individual ISAs which belong legally and beneficially to each parent.

    And if this is a bare trust then the CGT falls on the beneficiary not on the Trustees.
    • riccyboy
    • By riccyboy 10th Aug 18, 11:38 PM
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    riccyboy
    • #9
    • 10th Aug 18, 11:38 PM
    • #9
    • 10th Aug 18, 11:38 PM
    So can I assume it isn't a bare trust if the provider (SJP) lets the withdrawal take place?
    • Heedtheadvice
    • By Heedtheadvice 10th Aug 18, 11:39 PM
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    Heedtheadvice
    It would seem fundamental to your question to find out if this finance is a Trust in terms of it being a legal entity or other methods of holding the assets such as have already been outlined.



    There is a considerable difference between them that should not be underestimated and even the tax position (seeing as you mention it) CGT allowance for trusts being just half of that applicable to a person.



    You also mention Unit Trust and that is something different yet again, just being what has been purchased with the assets usually as an investment.


    You will probably have surmised from previous responses that there are many scenarios and you need to be able to clarify to get pertinent responses.


    Edit: to your question about assuming... No. It all depends how the funds were lodged with SJP (done correctly or incorrectly!). It does look as if it is not a bare trust from what you have written but that could be erroneous or not impossible that the trustee(s) have not acted correctly.
    Last edited by Heedtheadvice; 10-08-2018 at 11:49 PM. Reason: addition
    • riccyboy
    • By riccyboy 10th Aug 18, 11:55 PM
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    riccyboy
    The investment is a SJP jointly owned Unit Trust (according to the last Quartelrly Unit Trust Valuation I was sent). It has a plan/account number UT1234567 ABC (ABC being my daughter’s initials). Does that help clarify?
    • bowlhead99
    • By bowlhead99 11th Aug 18, 12:41 AM
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    bowlhead99
    The investment is a SJP jointly owned Unit Trust (according to the last Quartelrly Unit Trust Valuation I was sent). It has a plan/account number UT1234567 ABC (ABC being my daughter!!!8217;s initials). Does that help clarify?
    Originally posted by riccyboy
    To avoid any confusion, a 'unit trust' is simply a type of collective investment scheme where whoever wants to invest in the scheme aquires 'units' (as opposed to some other types of collective investment scheme which have you aquire 'shares'). The word 'trust' is just a reference to the legal structure of the type of investment fund in which thousands of people will participate - it doesn't imply this is a trust arrangement for the benefit of the child.

    The description of "a SJP jointly owned UT" as distinct from a "SJP UT held under trust for the benefit of Child A Smith" seems to imply that this isn't a trust arrangement where the parents and grandparents are bare trustees and the CGT is assessed on the child as bare beneficiary of the pile of units. Instead if is an arrangement where a bunch of named owners jointly own a pile of units. The nonspecific language from SJP doesn't say whether those owners agreed to be considered joint tenants or tenants in common in relation to the property they own between them.
    Or it would be possible for the money contributed by just one individual to a joint account to be a "gift" to the other parties (on the basis that any one of them could withdraw money from the account)?

    I say this on the basis that it appears from the first post that just one of the parties can give instructions to sell units and can pass the cash to another two of the parties?
    Originally posted by xylophone
    The fact that the terms and conditions of operating the account (governing the relationship between the investment provider or service provider and the joint owners of the account) might allow just one person to give instructions to sell units in the account and have the fund manager write the cheques to whichever person they designate, does not automatically make the money paid in by one person belong to the others at the point it's paid in or the point an investment is made.

    The account terms are a starting position between the financial service business on one hand and ther owners on the other, but the rights between the individual parties depend on what they have agreed with each other. When one person takes money out that they didn't put in (and the person who had funded the account doesn't say it's merely a loan to the person withdrawing it), that withdrawal would be generally considered to be a gift from whoever's money it was, to the person walking away with the money - but of course you have to assess each case on its individual circumstances.

    For spouses or civil partners owning a joint account together, HMRC will consider that any of the income in the account being earned over time is beneficially owned 50:50 between the two of them. Even if the account is owned as unequal shares, HMRC will still treat any income as being taxable on the couple on the equal basis unless you make a declaration that it is not equal shares and declare that you want to be taxed in line with your beneficial interests.

    Between the parties that aren't spouses, HMRC will normally regard each account holder of a financial account as beneficially entitled to the proportion of the account attributable to their contributions; so for the non-spousal parties (i.e. the parents vs the grandparents) they never put any money in to the SJP platform; so their money wasn't used to acquire the unit trust; it may follow that they wouldn't seem to have a beneficial ownership of it, and it would follow that the income from the unit trust isn't theirs, the gains on the unit trust isn't theirs.

    An exception I suppose would be if the assets in the account (or the units in the unit trust if held directly rather than on a platform) were agreed to be owned as 'joint tenants' regardless of who funded them, rather than 'tenants in common in unequal shares' a bit like the choice when buying a house; and then the gifting from one person to the others would have occured at the time of acquisition. If nothing was documented at the time, it would perhaps be difficult to convince HMRC that the investment was actually owned as a four way split even if all four people have signing rights.

    - -
    I probably mis-spoke earlier in my initial response when I said that there is an automatic assumption that a person and their spouse are joint owners 50/50 of the property they acquired. Long day and not enough coffee . From HMRC perspective the *income* from the asset owned between spouses is automatically 50/50 jointly owned regardless of how the asset's beneficially owned, but that doesn't mean the asset itself is automatically beneficially owned 50/50 from HMRC's view. And it is how it is actually beneficially owned which is what's going to drive the CGT calc.


    So, if the SJP account was funded from the grandparent-couple's joint account it doesn't seem much of a stretch to say the units belong jointly to them; but if the SJP account which aquired the units was funded entirely by one grandparent, then one might assume the units belong to that one grandparent, and any gain belongs to that one grandparent - even if any income generated by the assets along the way is considered fair game for HMRC to tax each member of the couple equally. Income tax is a separate tax regime to CGT with different rules and case law.

    This talk of who owns the assets for CGT purposes is presuming by the way, that all the 4 people's names are stamped on the SJP account but they are not joint tenants who were gifted something when the one grandparent put in each and every element of the £25k over the period of years - instead they are tenants in common with beneficial interest shared unequally and don't actually have such interest until either the grandparent gives them a specific gift or they put their own money in.
    • riccyboy
    • By riccyboy 11th Aug 18, 9:08 AM
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    riccyboy
    Thanks everyone for all your comments, really appreciate it. Think I need a conversation with SJP!
    • AnotherJoe
    • By AnotherJoe 11th Aug 18, 9:21 AM
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    AnotherJoe
    Thanks everyone for all your comments, really appreciate it. Think I need a conversation with SJP!
    Originally posted by riccyboy
    Seems to me it's nothing to do with SJP how the tax is managed and they will not make any comments on how the tax is handled as that will open them up to liability.
    And as said above, it's not a trust in any way shape or form, presumably someone opening this up years back mistakenly thought they were opening a trust because they were buying a Unit Trust.
    Let us know what they say.
    • riccyboy
    • By riccyboy 11th Aug 18, 10:27 AM
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    riccyboy
    They said it’s not a bare trust, so it’s just a designated UT account (meaning that the withdrawal can go ahead ok and the CGT will be covered by the grandparents (married) joint CGT allowance. Thanks everyone.
    • Heedtheadvice
    • By Heedtheadvice 12th Aug 18, 1:26 PM
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    Heedtheadvice
    Riccyboy,
    I still feel unsure as to whether or not you are perhaps making an invalid assumption!


    Who are the 'they' you refer to?
    If you mean SJP then, unless they were instructed to or were aware that the investement was held in trust, then they will not necessarily (or indeed unlikely) to have opened an investment account suitable for a (bare or otherwise) trust. They would thus be unable to comment or as has been said could not comment other than how the account could be managed by the investors. It is perfectly possible that the account has been opened erroneously by the investors!


    If by 'they' you mean the grandparents then they should know however they may have been under the impression that a Unit Trust meant that the investment was then held in trust , as per Joe's comment.


    Now I may be wrong but taking any action that was not in the original investors wishes may cause problems especially if the beneficiaries are not the original investors etc.


    I hope others can comment further and you read before taking any action!
    • riccyboy
    • By riccyboy 12th Aug 18, 4:46 PM
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    riccyboy
    Thanks. ‘They’ are SJP and they confirmed it wasn’t a trust (which was my understanding as a joint owner of the unit trust investment account).
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