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!