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Is a 'Bare Trust' a good way to save for my DD or is there a better tax free option??

8 replies

PutThatInYourPipeandSmokeIt · 19/02/2008 08:48

She has a Child Trust Fund but we want to put money that friends and family give her in to a different account so that she doesn't have immediate access to everything when she is 18...just incase.

Someone has suggested a bare trust in our names and her name but as I understand it, she would only be entitled to the first £5,225 of income to to tax free and £9,200 of gains (per annum).

Is there a better option out there??

OP posts:
meglet · 19/02/2008 09:02

I'm not sure of all the details but we have a national savings bonds account (I think thats what is is off the top of my head) held in trust by me and DP. So DS can't have it until we say he can, regardless of how old he is. To be honest I'm not sure if there are any tax implications but I just wanted to make sure he couldn't get his hands on all his money at 18, it can wait until he needs a car / flat etc.

MrsBadger · 19/02/2008 09:46

no better option that I know of - PIL is setting up a bare trust for dd on the advice of his IFA.

Prufrock · 19/02/2008 09:57

Key with a bare trust (which can be done simply by appending childs initials to the account in your name) is to choose non income generating funds - which is what you want for such a long term investment anyway. And I don't think any of the income is tax free - for income tax purposes the money is still counted as yours, but would not normally be part of your estate for IHT.

For CGT, the gain is only taxable when realised. And again, until the money is handed over, it's counted as yours, so any gains on switching investments until then will come of your annual allowance. But after handover, dd can sell investments to make gains of whatever CGT allowance is then each year - so unless your planning to give her ginourmous amounts (in whcih case you should be consulting an IFA - she shoudl be able to realise things over 2/3 years

LadyMuck · 19/02/2008 10:58

It is also worth keeping track on any capital losses that you or your dh make along the way as these can be carried forward and use against cgt. Our dcs bare trusts are in my name, as we assumed (falsely so far) that I would have more years at a lower tax rate. But it is relatively easy to switch other assets prior to selling in order to ensure that the correct spouse has the loss.I think that it is also reasonably sound investment advice to consider starting to switch out of growth unit trusts slowly in the 5 or so years before you consider handing over the moeny to protect the investment agianst a stock market devalauation.

But I agree with Prufrock - if you go for capital growth unit trusts then there is relatively little income each year. Looking at what the dcs have I would say that there is taxable income of less than 1% pa.

PutThatInYourPipeandSmokeIt · 19/02/2008 16:34

That's extremely helpful - thank you for your replies.

Does anyone know the difference between an investment plan and a bare trust fund in terms of the return on it?

OP posts:
frogs · 19/02/2008 16:47

You can set an investment fund up as a bare trust -- you just have to append the child's initials to the name of the account holder. There's usually a box to tick on the application form.

The return will vary according to what kind of fund you choose anything from developing economy smaller companies to FTSE 100 tracker. For a child, if it's your only or main investment for them, you should probably play it safe and choose a UK-based fund trackers tend to have the lowest fees, though global growth investment trusts are also low-fee if you fancy something a bit more exciting.

We have M&G FTSE All-share trackers for money the Gparents gave, Fidelity moneybuilder (or some name like that) for the child benefit, and a Witan investment trust for some money the kids inherited.

My understanding is that each child can receive £100 per parent of tax-free income from money given by parents -- if the money does not originate from their parents, then income up to the level of their personal allowance should be tax-free. But if they have suficient investments to be generating that kind of income, then you'd probably be taking specialist advice anyway...

ready2pop · 22/02/2008 13:27

BEWARE - under a bare trust your children will be entitled to the cash at 18 anyway!!

The beneficiary of a bare trust is entitled to both its capital and income. However, children can't hold property in their own names during their minority so bare trusts are commonly used to make gifts to them before this. When they turn 18, they automatically have the right to the fund.

In taxation terms, bare trusts are treated as being totally transparent. As the beneficiary has the right to the fund they are treated as being its owner, in all but name. Consequently, income and gains would be treated as falling directly to your DD (or you until she is 18) and taxed under the normal income tax and CGT rules, i.e. tax would arise on anything beyond the personal allowance bands.

The tax advantage of a bare trust over the other types of trust is that no tax charge arises on its creation, whereas they now give rise to charges on the setting up of the trust, at its end and 10 yearly during its continuance.

There is a useful description of the different types of trut and their tax treatment here -

If your main concern is that the funds stay safe beyond your child reaching 18 then you would need a discretionary trust, which would mean an immediate tax charge.

The position is complicated and I agree with last poster that if you are thinking of creating a fund large enough to be generating more than the personal allowance by way of income each year then you should definitely get some specialist advice - may well save you some money in the long run.

Sorry for the long post - have been thinking about setting up something similar myself and also used to be a lawyer doing this sort of thing.

PutThatInYourPipeandSmokeIt · 22/02/2008 17:25

OH THAT'S GREAT THANK YOU. The more easy to understand info the better! So actually a bare trust is the same as a CTF in that sense? Oh poo. Is there anything better??

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