Q. We wish to start making provisions for our grandchildren and it has been suggested that we could consider a “Bare Trust” as a vehicle for doing this. Could you please let me know whether this is possible, how the Bare Trust works and the tax implications if any of using this option? A. A Bare Trust, or as they are often referred to “a simple trust”, allows the trustees to simply hold trust assets on behalf of the beneficiary. The beneficial interest in the asset belongs to the beneficiary and any income it generates also belongs to the beneficiary. In effect the trustees are transparent and this is very different for example to a discretionary trust (known as a substantive trust). In most cases a bare trust has only one beneficiary but there is no technical reason why the trust cannot have more than one. Where the trust has more than one beneficiary then each one would normally have an equal share although this is not strictly necessary. Bare trusts are frequently used by grandparents who wish to provide for grandchildren who are too young to accept and invest the gift personally. Therefore as an example, the grandparents can in their lifetime open an interest bearing bank account in the name of the grandchild and transfer money into the account. The monies belong to the grandchild but the grandparents would retain signatory powers and if appropriate might withdraw funds to be applied for the benefit of the grandchild for example to cover school fees. It must be remembered though that any funds withdrawn must be for the benefit of the grandchild as they belong to him/her. On attaining age 18 the beneficiary of the bare trust can insist that the trustees release the trust assets and any income which has accrued. Legally prior to age 18 the beneficiary is considered incapable of providing the trustees with a valid receipt for the assets and hence the need for the bare trust enabling the trustees to hold the gifted property on behalf of the beneficiary until he/she reaches what is deemed to be the status of a responsible adult at the age 18. For many it is this aspect of a bare trust and the right of the beneficiary to demand the assets of the trust and any accrued income at age 18 that can give cause for concern. Many consider this to be a disadvantage especially if the assets involved are substantial as many still regard the age of 18 as too young for a grandchild to effectively inherit significant sums of money. If the assets cannot be given during the grandparents’ lifetime the Bare Trust can also be created by the enactment of a will of a grandparent whereby assets are to be held on bare trust for all the grandchildren in equal shares. Considering taxation of a Bare Trust then for capital gains tax (CGT) and inheritance tax (IHT) the beneficiaries and not the trustees are treated as the beneficial owner of the property held in the bare trust. Any capital gains arising within the trust are those of the beneficiary but even if they are a minor they are entitled to the current annual exempt amount of £10,600. Should the beneficiary die whilst a minor the trust property forms part of his/her estate for IHT but would potentially fall within their nil rate bands (currently £325,000) and thus no IHT would actually arise. Under these circumstances the trust property would normally pass to his/her parents under the current intestacy laws as a minor cannot execute a valid will. The transfer of property into trust is a potentially exempt transfer, and not a chargeable lifetime transfer for IHT purposes. Thus no IHT arises if the grandparent survives seven years. A CGT liability may however arise on the transfer unless, say, cash is transferred. For income tax purposes, the income is that of the minor and they can use their personal annual income tax allowance against any income arising. Please note that it the transferor of the property is one of the parents, rather than the grandparents, and the income of the trust exceeds £100 in a tax year then the income is subject to income tax on the part of the parents. As with all tax planning then professional advice should be sought for your particular circumstances to ensure that all appropriate steps are taken and legal requirements met. If you are unsure on any the points made above, please give the TaxWise Advice Line a call on 01455 852555.