Potential Exempt Transfer

(rachel2) #1

An IFA is suggesting my client make 3 x gifts of £250,000 to his grandchildren to bare trusts until the age of 25.

Would these be PETs or lifetime chargeable transfers as the funds are not received until the age of 25?

Rachel Stafford
Rachel Stafford Legal Services

(andrew.goodman) #2

They can’t really be bare trusts that vest at age 25. “Bare” denotes that the beneficiary is absolutely entitled.
He could mean a regular bare trust and just pay it over when they are 25 (but they would have the right to call for it at any time from 18).[If so, they would be PETs].

Andrew Goodman
Osborne Clarke LLP

(Paul Saunders) #3

If the grandchildren are not to be able to access the funds until age 25, they cannot be bare trusts so that the gifts will be immediately chargeable transfers.

Paul Saunders

(Neil Jones) #4

The TSEM does give some examples of what HMRC consider a bare trust and what they don’t. Interestingly they have an example where access for the beneficiary is only available from age 21 and this, in their eyes, is a bare trust, although the example is on death rather than lifetime gifting.

https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem1563

Regards

Neil Jones
Canada Life

(Paul Davidoff) #5

HMRC’s view in the example that Neil Jones mentions (example no.1 in TSEM1563) seems rather surprising on a first reading. The scenario in that example is as follows:

“Mrs A left the residue of her estate to such of her grandchildren as were alive at the date of her death. She directed that the funds should not be paid to the grandchildren until they respectively attain age 21 years.”

HMRC’s analysis is:-

“All of the grandchildren who were alive when Mrs A died are entitled to an equal share in the residue of the estate. There are no other conditions that they must fulfil before they become entitled. The direction about payment does not affect this basic position. The beneficiaries have a vested interest and the trust is a bare trust. The income ought to be returned as the children’s own income and not that of the trustees.”

This seems to me to be a situation where the testator directs the trustees not to hand over the trust fund to the relevant beneficiary until the beneficiary is 21, even though the trust is in actual fact a bare trust and (ie the beneficiary has a vested interest in the capital and income from the date of death) and even if the beneficiary has turned 18 and could give a good receipt. It is just that the trustees are directed not to hand over the trust fund voluntarily.

This is subtly different from a trust where the beneficiary only gets a vested interest at 21 and this will turn on the precise wording of the Will. I cannot say that I have seen a Will which is drafted in the manner described in HMRC’s example, but it is a reminder to me always to check the actual drafting carefully, rather than to assume that the reference to a specified age makes it a substantive trust.

Paul Davidoff
New Quadrant Partners Ltd

(Paul Saunders) #6

I think HMRC is mischievously drawing a fine line here.

I believe the wording used in example 1 seeks only to postpone payment of the legacy rather than imposing a condition for vesting (making it an 18-25 trust).

The beneficiaries are entitled to call for the subject matter of the legacy to be transferred to them immediately upon attaining age 18, and do not have to wait until they are 21. Nowadays, I suspect trustees might be criticised if they do not inform the beneficiaries of the legacy when they attain 18.

If any of the beneficiaries claim means tested benefits or grants before the legacy is paid to them at age 21, there is potential for such benefits, etc. to be clawed back on the basis of material under-declaration of their assets.

Paul Saunders

(Malcolm Finney) #7

A bare trust is one which by definition does not impose any contingency to be satisfied on the part of the beneficiary(ies).

Are the proposed gifts thus subject to any contingency? Does the reference/wording to age 25 give rise to a contingency?

On the face of it there is merely a postponement as to payment but not vesting.

I would suggest in the absence of other evidence that the gifts are thus PETs.

Malcolm Finney