Your friend has told you that he has set up a bare trust for his

grandchildren to avoid Inheritance Tax. You’ve met with your

accountant to discuss doing the same but he seemed rather

cool on it. So is a trust a good or bad idea?

 

Avoidance?

 

Despite Gordon Brown’s well-known aversion to them, there

are still good reasons for using trusts as a way to make gifts.

And they can be effective for tax planning. The simplest form

is a ‘bare trust’, sometimes called an ‘absolute trust’. But

when should you consider using one?

 

Do you need a trust?

 

If you make a gift to someone and survive for the next seven

years, it won’t form part of your estate for Inheritance Tax (IHT) purposes. But if, for example, the person you want to make the

gift to is under 18, they won’t be legally entitled to hold assets in their own name. It’s therefore necessary for a parent or another adult (trustee) to control the assets on behalf of the child, i.e. on bare trust.

 

Tip

 

Even if you’re the settlor of a trust, i.e. the person that put the assets or money into it, you can be a trustee. This means you can continue to manage the funds how you want.

 

Trap

 

A beneficiary of a bare trust who is 18 years old or more is entitled to have the assets transferred into their own name.

 

IHT benefits

 

In 2006 Mr Brown dropped an IHT bombshell by declaring that from Budget day all gifts into a trust would now be treated in the same way. That is, subject to an IHT charge for gifts over a certain value.

 

Tip

 

The good news is that bare trusts are unaffected by the 2006 changes to the IHT rules. This means that you can make a gift, of any value, using a bare trust and provided you survive for a further seven years it will be exempt from IHT.

 

CGT benefit

 

Unlike most other trusts, the assets in a bare trust belong to the beneficiary, even though they are legally held in the name of the trustees. This can have some tax advantages.

 

Tip

 

If trust assets are sold, and this results in a gain, each beneficiary can use their personal Capital Gains Tax (CGT) exemption against their share of the gain. With other types of trust, there is only a single, smaller CGT exemption available.

 

Income tax benefits and drawbacks

 

If you make a gift to your own child, directly or using a trust, any income it produces will be treated as yours for tax purposes. But, if the gift is from anyone else, e.g. a grandparent, the income is treated as the child’s. this means they can use their tax-free allowances against it.

 

Practical planning

 

If a bare trust has been set up for your children, there’s nothing to stop this continuing after they reach 18. They could ask for their share of the trust fund to be handed over. But the trustees, which may include you, could advise them it would be in their interests for you to continue managing the funds for a few more years.

 

Conclusion

 

Bare trusts are definitely beneficial in allowing the donor some control over assets that have been given away. They also have potential IHT and CGT advantages over other trusts.