Introduction
The benefits of a bare trust can be summarised as:
- certainty over who can benefit
- efficient Inheritance Tax (IHT) treatment of the initial gift – a Potentially Exempt Transfer
- No ongoing IHT charges on the trust
- for Income Tax and Captial Gains Tax purposes the trust is transparent, with the liability falling on the beneficiary (or beneficiaries) at their own rates of tax and with access to their own personal allowances and reliefs
The last benefit above is restricted though by an anti avoidance rule known as the ‘Parental Settlement Rules’.
Parental settlements
One area often overlooked is the source of the money in relation to income tax. Where assets are placed under trust from parents for minor unmarried children, if gross income exceeds £100 per annum all of the income will be taxed as if it was the parents’. This is per parent (settlor), per child. For collective investments (unit trusts and OEICs), this applies to income that is distributed as well as income that is re-invested into accumulation units. Income below the £100 limit will continue to be assessed as the child’s income and taxed accordingly.
This has applied to bare trusts since 9 March 1999 and applies whether the income is paid to the child or not. For trusts created before this date which have not had any additional funds added, the £100 rule does not apply. Where the trust is a discretionary trust, the £100 rule will only apply where income is actually distributed from the trustees to the minor beneficiary.
