I have clients who want to make substantial lifetime gifts to grandchildren and, because of the nature of the assets, have to use bare trusts. I have told them about a bare trust being, effectively, a nominee arrangement, so that each grandchild will, on reaching 18, be able to call for the transfer of the assets to him. The clients are not happy about 18-year-olds having free access to large sums of money - a universal concern.
Their accountant has pointed out to me TSEM1563. This gives an example (Example 1) of a Will leaving residue to those of testatrix’s grandchildren who survive her, but directing that money is not to be paid out until each reaches 21. This is given as an example of a bare trust - which is clearly correct in that each grandchild alive at the date of death has a vested interest, and it is only the direction as to age which delays payment.
I am asked if the new bare trusts cannot impose a similar condition delaying payment to a later age. My instinct is that this is not possible (not least because, if it were, everyone would be doing it) but I cannot put my finger on any authority for that.
In IHT terms, bare trusts with payment delayed beyond 18 would, I think, be 18-25 relevant property trusts, but the amounts are with the clients’ NRBs and they have made no previous chargeable transfers, so that is not a problem.
It is entirely possible to defer the payment date in the way suggested. However, that does not get over the fact that it remains a bare trust and the rule in Saunders v Vautier will still apply (the child is the only possible beneficiary) and so the child will be able to call for payment of the trust fund as soon as they reach age 18 regardless of the deferred payment date. Such a trust would not be an 18-25 trust for IHT purposes.
Graeme Lindop
Coles Miller Solicitors LLP
Could it not be an interest in possession trust with powers of appointment and letter of wishes?Just an initial thought!?
Jane Huntley
Chadwick’s, Leyland
A bare trust can contain the S32 Trustee Act 1925 power of advancement. The trustees can use this, if thought appropriate before the child attains age 18, to resettle the assets on longer term trusts for his or her benefit . It is not thought that any IHT charge arises on such a resettlement, but because of that it would not be possible to hold over any capital gains.
The assets in question are segments of investment bonds, and the advice from the accountant and IFA on the tax consequences is that we are stuck with bare trusts.
I think that the answer to the accountant’s query is that the Manual is there to help HMRC decide how to apply the CGT and IT rules to a particular set of circumstances, not to give useful real-world examples to practitioners.
We can look at a settled advance when the time comes. That is a more constructive approach than the usual advice to the trustees to invite the beneficiary not to take the money an his 18th birthday.
HMRC are likely to strongly resist an assertion that there is no transfer of value on advancing assets from a bare trust to relevant property trust. Also, HMRC are of the view that a minor can be a settlor (see Capital Gains Manual at CG37902) so holdover relief would not be available in any event.