Am I correct in thinking that HMRC’s view, based on below guidance, is that, even if s.31 applies to a bare trust for minors, that does not stop there being an interest in possession?
HMRC’s view, which seems good law to me, is that a minor with an absolute interest in capital is not deprived of it by s31 because his interest in the income is at worst only postponed because he will be entitled to any accumulated income on attaining 18. In short it is as much a bare trust as it would be for an adult. If the minor has a vested interest in income but not in capital (has a right to income for life or a specified period or subject to defeasance) then he is entitled to the accumulations on attaining 18 and so, by dint of the same reasoning, must have an IIP during minority so could be a QIIP if s49 IHTA applies. But subject to a contrary intention in the trust instrument: s69(2) TA 1925.
Jack Harper
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Thanks, Jack. That’s helpful.
What would be the tax impact for a minor receiving a bare trust of a rental property, could this be paid out and declared on their self assessment as though they owned it or would it have to be accumulated income until they are 18 and therefore pay 45% tax within the trust? thanks in advance
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The income tax position ought to be accorded the same analysis by HMRC as it should be governed by the same legal foundation as they accept for IHT. The minor is taxed on income received during minority, per the trustee’s discretion. Any income still owing at majority is taxable in the year of attaining majority. The fact that the minor is going to be entitled eventually to all the income arising during minority does not displace income tax’s receipts basis.
This can be disadvantageous, mainly because it prevents the offset in each tax year of the personal allowance, an excess of which cannot be carried forward. The remedy where it is desired to use the PA every year but not distribute a covering amount of income to the minor/parent (given a parent’s receipt clause), is to disapply s31. The minor is then assessable annually on the income of each tax year less his PA. The minor/parent cannot compel the payment to him during minority. It also avoids deduction of tax at 45% and the need to seek refunds.
If the original trust deed does not do this it will often be possible to appoint a separate interest to him to which s31 does not apply if the trustees have power to do that. If income is very substantial settlors often seek to extend the discretionary period for distributing income beyond 18 e.g. to 25 despite any income tax downside and to do that s31 must be modified to prevent income entitlement for the minor in post majority income.
Where a parent is the settlor he or she will usually wish to prevent payments of income to minor children to avoid being taxed as settlor.
These income tax rules only apply to minors who have an absolute interest in income and capital (bare trust) or just in income. Any accumulations of income that do not belong to a beneficiary who attains 18 are added by s31 to the capital that produced them. This would be so if the beneficiary died before 18 or had an interest that ended before 18 even if he had a vested interest in the income until then and so a contingent right to the accumulations. Where income accumulations are added to capital under s31 or a separate specific power of accumulation it cannot thereafter be paid out as taxable income so loses the attached pool credit.
Whether the minor is taxable on the rental income year by year in the case posed by the question will depend on what the bare trust says. s31 applies to a vested interest of a minor in capital and income unless excluded or modified and with a bare trust the powers to do that once the minor’s interest has vested will almost certainly not be available. However s32 should still be available to make a separate appointment to the minor which excludes s31 if it is shown to be for his benefit (and it may save the costs to the trust of making refund claims). This is not a suitable DIY operation and the costs of professional assistance may not be worthwhile.
Jack Harper
What would be the tax impact for a minor receiving a bare trust of a rental property, could this be paid out and declared on their self assessment as though they owned it or would it have to be accumulated income until they are 18 and therefore pay 45% tax within the trust? thanks in advance
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jack:
with an absolute interest in capital is not deprived of it by s31 because his interest in the income is at worst only postponed because he will be entitled to any accumulated income on attaining 18. In short it is as much a bare trust as it would be for an adult. If the minor has a vested interest in
Thanks, Jack. That’s helpful.
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thank you for the detailed response, having reviewed this further and sections S31 and S32. Could you kindly clarify if the objective is for the income circa 30k a year is to be paid to the child and declared on the child’s tax return as this is a gift from a grandparent to a grandchild. Do we need to ensure that the bare trust documents reference disapplying s31 and allow for distribution each year or have I miss understood what we would need to do to ensure the income is not accumulated. Thank you
The income needs to be entered on the child’s tax return and will be eligible for PA (subject to their other income) and taxed year by year. It can be retained (not accumulated and added to capital) until the child is 18 or distributed as and when the trustee sees fit. As the child cannot make a Will (unless privileged) the funds retained, or distributed but unspent or invested, will be liable to IHT on their death intestate, first dibbings to parents if living. Such a trust is usually designed to allow income after tax to be distributed regularly and spent on the child but avoiding the 45% trust rate and cashing in the PA annually as no carry forward of it.
The trust can authorise the trustees to accept a parent or grandparent’s receipt. Administrative provisions can be included but not dispositive provisions or it will become an RPT for IHT. I think a gift over on the child’s death under 18 makes it a settlement for persons in succession so an RPT. But not settled property for CGT because the child remains absolutely entitled but for being a minor. It does not prejudice the income tax treatment.
Income distributions out of an RPT are not liable to IHT but there will be a charge on a TYA occurring during the child’s minority and on attaining majority. If the RPT has a full NRB the rate may be 0% on each occasion. Typically this will be so because the transfer in will have been accepted to be a CLT; it will not have been a PET (transfer into a RPT). So a gift over on death under 18 to avoid intestacy may not be the right choice to make.
Jack Harper
disapply s31.
thank you for the detailed response, having reviewed this further and sections S31 and S32. Could you kindly clarify if the objective is for the income circa 30k a year is to be paid to the child and declared on the child’s tax return as this is a gift from a grandparent to a grandchild. Do we need to ensure that the bare trust documents reference disapplying s31 and allow for distribution each year or have I miss understood what we would need to do to ensure the income is not accumulated. Thank you
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Previous Replies
The income tax position ought to be accorded the same analysis by HMRC as it should be governed by the same legal foundation as they accept for IHT. The minor is taxed on income received during minority, per the trustee’s discretion. Any income still owing at majority is taxable in the year of attaining majority. The fact that the minor is going to be entitled eventually to all the income arising during minority does not displace income tax’s receipts basis.
This can be disadvantageous, mainly because it prevents the offset in each tax year of the personal allowance, an excess of which cannot be carried forward. The remedy where it is desired to use the PA every year but not distribute a covering amount of income to the minor/parent (given a parent’s receipt clause), is to disapply s31. The minor is then assessable annually on the income of each tax year less his PA. The minor/parent cannot compel the payment to him during minority. It also avoids deduction of tax at 45% and the need to seek refunds.
If the original trust deed does not do this it will often be possible to appoint a separate interest to him to which s31 does not apply if the trustees have power to do that. If income is very substantial settlors often seek to extend the discretionary period for distributing income beyond 18 e.g. to 25 despite any income tax downside and to do that s31 must be modified to prevent income entitlement for the minor in post majority income.
Where a parent is the settlor he or she will usually wish to prevent payments of income to minor children to avoid being taxed as settlor.
These income tax rules only apply to minors who have an absolute interest in income and capital (bare trust) or just in income. Any accumulations of income that do not belong to a beneficiary who attains 18 are added by s31 to the capital that produced them. This would be so if the beneficiary died before 18 or had an interest that ended before 18 even if he had a vested interest in the income until then and so a contingent right to the accumulations. Where income accumulations are added to capital under s31 or a separate specific power of accumulation it cannot thereafter be paid out as taxable income so loses the attached pool credit.
Whether the minor is taxable on the rental income year by year in the case posed by the question will depend on what the bare trust says. s31 applies to a vested interest of a minor in capital and income unless excluded or modified and with a bare trust the powers to do that once the minor’s interest has vested will almost certainly not be available. However s32 should still be available to make a separate appointment to the minor which excludes s31 if it is shown to be for his benefit (and it may save the costs to the trust of making refund claims). This is not a suitable DIY operation and the costs of professional assistance may not be worthwhile.
Jack Harper
What would be the tax impact for a minor receiving a bare trust of a rental property, could this be paid out and declared on their self assessment as though they owned it or would it have to be accumulated income until they are 18 and therefore pay 45% tax within the trust? thanks in advance
–
Previous Replies
with an absolute interest in capital is not deprived of it by s31 because his interest in the income is at worst only postponed because he will be entitled to any accumulated income on attaining 18. In short it is as much a bare trust as it would be for an adult. If the minor has a vested interest in
Thanks, Jack. That’s helpful.
What would be the tax impact for a minor receiving a bare trust of a rental property, could this be paid out and declared on their self assessment as though they owned it or would it have to be accumulated income until they are 18 and therefore pay 45% tax within the trust? thanks in advance