Stand-out Q – bare trust…

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TUE, 23 DEC 2014

Our Technical Hub provides access to a wide range of pension tax and trust technical resources. Every now and then we post tweets covering stand out questions from our technical content and our answers in case others might also find them helpful. As Twitter’s character restrictions only allow for the bare bones of the Q&A we link to the details here, too.

Question

Is a designated account sufficient evidence that a client has created a bare trust for their grandchild?

Answer

Many grandparents will set aside sums of money with the intention of gifting the sums to their grandchildren and, where the grandchildren are young and unable to hold the assets in their own name, the grandparents will often want to hold the funds on their grandchildrens’ behalf as bare trustees. The question then arises as to how the bare trust is constituted so the gift will be valid for tax purposes.

One question which often arises is whether designated accounts, for example with unit trust managers or some discretionary fund managers, are sufficient to constitute a bare trust. Designated accounts are set up when, for example, the grandparents invest money and name the account using both their own names and by using their grandchild’s initials as a reference. This can prove to be confusing for many clients and advisers, as many mistakenly believe that the designation will constitute an outright gift and going forward, the investments are held by the grandparents as bare trustees.

Unfortunately, the designation alone does not constitute a transfer of ownership or beneficial entitlement. For tax purposes, any income and gains will still be the grandparents’ and the assets will still be in their estate on their deaths.

Grandparents will therefore need to do something in addition to designating the holdings. In practice, this will usually be either a simple declaration of trust or a separate bare trust document, which should be properly signed and dated.

Whether the declaration of trust or bare trust document is used, it should clearly identify both the beneficiary and the property subject to the trust. We recommend that the bare trust document is kept with important papers such as any wills, which provides later evidence of the intention to make the gift outright to the grandchild.

Although it may well be that, in practice, HMRC do not choose to pursue this point, we recommend that the intention to make the gift prior to or on the purchase of the units is fully documented using a separate bare trust or declaration of trust document, particularly where substantial sums are involved, to avoid the questions which may otherwise need to be answered on the death of the grandparent and to avoid any adverse IHT consequences.

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