IHT: Possible to pay the “Bare” minimum?
Following on from an earlier article on inheritance tax (IHT), there was mention of a way to make provision for your children, without being involved in a long period of running a trust and incurring IHT charges including the costs associated in running a trust. The answer might be creating a Bare Trust.
What is a Bare Trust?
A Bare Trust is a trust in which the assets are gifted into it by the donor. These are then held by people who look after and manage the trust – known as “trustees” – usually on behalf of young people until they are old enough.
Whilst the assets are held in the names of the trustees, the assets belong to the beneficiaries, so the trustee is obliged to hand over the assets to the beneficiaries should they ask for them, as soon as the beneficiary is 18 years old or over.
The advantage of having a Bare Trust, compared to other trusts, is the simplicity and it is easy to understand. Because of this it is simple to administer and therefore, the costs are not too high.
The disadvantage is that the beneficiaries will come to own, potentially, a substantial value at a young age. However, close to the beneficiary reaching 18, and provided there are adequate powers given to the trustees, the trustees can ‘advance’ the asset to another trust. This would prevent the beneficiary inheriting at 18 under the Bare Trust, and, therefore, inheriting at a later age under the terms of the other trust.
Such action could have tax consequences which will need to be carefully reviewed at the time. Careful considerable should, therefore, be given as to how the beneficiaries can be protected and avoid them becoming vulnerable. Therefore, if the donor is concerned about assets passing to a beneficiary on reaching the age of 18, then a Bare Trust may not be what they want. Alternative gifting could be considered.
There are also some tax advantages in putting in place a Bare Trust. Inheritance tax was discussed in the previous article mentioned above.
Capital Gains Tax (CGT)
There will be a disposal deemed at market value of assets by the donor to the Bare Trust, which could be subject to CGT. During the life of the trust, the charge to CGT will be a liability of the beneficiaries, who will have available their annual CGT exemptions. The rate of tax will be the beneficiaries’ rate of tax.
When trustees hand over assets to the beneficiaries, there will be no CGT, as the assets already belong to the beneficiaries. On the death of beneficiaries, there will be uplift to market value at the point of death – consequently, no charge to CGT.
If the income is below the beneficiaries’ personal allowances and they have no other source of income, there will no income tax liability. The beneficiaries (or the parent on behalf of a minor), not the trustees, would need to file with the Revenue their tax returns, whether or not income is paid to the beneficiaries.
If the trust created by the donor is in favour of his or her child under the age of 18 years, any income in excess of £100 will be taxable in the hands of the donor and reported by the donor in his/her tax return.
Consideration should be given to the need of the beneficiaries over 18 years having a will in place. This would potentially avoid intestacy rules from applying to pass assets back to the beneficiaries’ parents if they were the beneficiaries’ ‘Next of Kin’. Without a will in place there is a risk of undoing all the good gift planning put in place.
If you would like any advice relating to estate planning, contact Mehboob Dharamsi to see how he can help.