Chris Thorpe looks at circumstances where trusts can benefit children.
As part of succession planning and considering what happens to the family silver, minor children may often be the only successors. The problem is that under English law, minors cannot own property – they cannot own bank accounts, shares of land, property or companies.
Someone therefore has to own assets for them and have the legal title, so the children will be beneficial owners (and to all intents and purposes the real owners), but the legal owners will need to be adults.
Bare trusts
If the asset is to be held such that the child has full rights over income and capital, it would be in a ‘bare’ (or nominee) trust – the adult or parents would be the legal owners (trustees) with the child as the beneficiary. For tax purposes, bare trusts are transparent, so the child would be the owner as far as HMRC is concerned (children are subject to tax and have the same personal allowances as adult taxpayers). Bank accounts are common examples of assets being held in these types of trusts.
Once the child is of majority age, the bare trust does not automatically cease to exist, but the beneficiary can demand that the legal title of the assets be passed to them.
Discretionary or interest in possession trusts
If there are to be some greater controls over the assets and the trust is to continue for the children into majority age, an express trust can be created during a settlor’s lifetime or via their will.
Children can be life tenants of an interest in possession (IIP) trust and enjoy the income or use of the assets – though often it is not until they are 18 or older that they can do so.
Discretionary trusts afford trustees a greater degree of control over the assets under their charge; children of minority and majority age (as well as those not even born yet) can be within a specified class of beneficiaries.
These trusts (except IIP trusts created as part of someone’s will) are generally subject to the inheritance tax (IHT) ‘relevant property’ rules (i.e., IHT entry and exit charges, as well as those incurred every ten years). These charges do, however, allow for holdover relief for capital gains tax (CGT) purposes. Certain trusts for children escape these rules. Prior to the 22 March 2006 IHT changes for trusts (or April 2008 when those changes took full effect), a popular type of trust for children was the accumulation and maintenance (A&M) trust, but thereafter, no new A&M trusts could be created, and existing ones became discretionary trusts. A&M trust beneficiaries had to have a common grandparent, and until they reached the age of 25, the trustees could accumulate the income, after which it essentially became an IIP trust.
Bereaved minor or 18-25 trusts
Following the 2006 changes and the abolition of A&M trusts, if a deceased parent leaves assets to their children, those trusts escape the charges of the relevant property regime – on the assumption that the children receive legal title at 18. These are ‘bereaved minor’ trusts.
If the assets are to stay in trust until the beneficiaries are up to age 25, a partial exit charge will be incurred on those 18-25 trusts.
Settlor-interested trusts
If a child is a beneficiary of a trust settled by their parents (rather than grandparents or other relatives), any income within the trust above £100 is taxed on those parents; such ‘settlor-interested’ trusts will also not attract CGT holdover relief on assets being settled.
Practical tip
One of the advantages of trusts is that they allow children to effectively own assets without having legal ownership. Trusts settled by a child’s parents are settlor-interested, which has implications for income tax and CGT purposes, so assets owned by grandparents are often good candidates for placing into children’s trusts.
