The third consultation on Inheritance Tax (IHT) charges
for trusts assumes that every individual will have only one settlement nil rate
band (SNRB) to put against the periodic charges to IHT of all trusts created in
lifetime, or on death, by that individual.
(For more on the new SNRB, see my blog post of 19 June 2014.)
As the SNRB does not renew itself every seven years, the
well advised will soon begin to realise that the SNRB is a precious commodity
that needs to be preserved and carefully allocated.
The SNRB only needs to be allocated among ‘settlements’
though. As it seems that Bare Trusts are
not settlements for IHT purposes, if the SNRB does come into effect, there will
be no need to allocate any SNRB to Bare Trusts.
So, are Bare Trusts about to become all the rage, if you have young
children or grandchildren to plan for? You
can save your SNRB to allocate against your other trusts/will trusts instead!
Now is the time, then, to reacquaint ourselves with what
Bare Trusts have to offer. They are
traditionally used by parents or grandparents who want to shift value out of
their estates for IHT purposes by making gifts now but who also want to retain
some control over those gifts until the beneficiaries are older and wiser. However, as trustees of Bare Trusts must take
their orders from beneficiaries who are over the age of 18 (or, to put it
another way, Bare Trusts offer no protection from threats to wealth post age
18), Bare Trusts are traditionally the preserve of people wanting to make
provision for school fees/university fees for members of the family who are
still minors. The money will be
virtually all spent by the time the beneficiaries reach 18.
Bare Trusts are ideal if the trust funds are to be
invested in capital growth assets only.
Bare Trusts are a look-through for Capital Gains Tax (CGT) and so, while
there is a CGT disposal on getting assets into a Bare Trust, the minor’s own
CGT annual exempt amount is available to put against disposals by the trustees
and there is no disposal on the minor reaching age 18.
Bare Trust assets that produce income risk being taxed as
the parent’s income, if a parent was the settlor, under the Income Tax
settlement rules. However, grandparents
have no such difficulties and any income generated by the trust’s assets will
simply mop up the minor’s Income Tax personal allowance.
Age 18 need not be the end, though, if there are concerns
about a child gaining control of assets at such a tender age. If it is in the child’s best interests at the
time, a ‘settled advance’ pushing the age of entitlement out beyond 18 might be
possible, or if it is a Bare Trust of real estate and there are a number of
minors as beneficiaries, the rule in Crowe
v Appleby may permit the transfer
of the real estate to be delayed until the youngest beneficiary reaches
18.
Keep in mind, though, that, unlike appropriately worded
discretionary trusts, it’s not possible to add beneficiaries to a Bare Trust
once set up. So if achieving equality among children
or grandchildren is key, you need to be sure that the family isn’t going to get
any bigger – or you may be putting your hand in your pocket again!
