Bare trusts & designated accounts
Discussion
Another HMRC-ish query...
If a grandparent invested £1k for a grandchild
(into a unit trust which appears online as a 'designated account' with their child/the grandchild's parent as a co-account holder, and the grandchild's name as the account designation)
which then returned £5k after 21 years, and
where said liquidation proceeds were transferred directly from the provider to the grandparent
who then immediately transferred said amount straight on to their grandchild...
...how likely is it that HRMC would ever argue that this was a current year gift (valued at £5k)
and not the actions of a trustee distributing the proceeds of a bare trust to the beneficiary?
If a grandparent invested £1k for a grandchild
(into a unit trust which appears online as a 'designated account' with their child/the grandchild's parent as a co-account holder, and the grandchild's name as the account designation)
which then returned £5k after 21 years, and
where said liquidation proceeds were transferred directly from the provider to the grandparent
who then immediately transferred said amount straight on to their grandchild...
...how likely is it that HRMC would ever argue that this was a current year gift (valued at £5k)
and not the actions of a trustee distributing the proceeds of a bare trust to the beneficiary?
Edited by Mogul on Wednesday 10th March 15:06
I suppose you’d ask why at the age of 21 the funds can’t be transferred directly to the child ?
I have been taking advice on something similar recently regarding my children. To demonstrate that the asset is for the benefit of the children a lawyer will be drafting documentation to demonstrate what the intention was/is. In this case they have some shares in their names but they need to be transferred to a designated account...there is accompanying bare trust documentation to demonstrate why we’re doing what we’re doing. It’s belt and braces but I think where HMRC are concerned that can sometimes be necessary.
I have been taking advice on something similar recently regarding my children. To demonstrate that the asset is for the benefit of the children a lawyer will be drafting documentation to demonstrate what the intention was/is. In this case they have some shares in their names but they need to be transferred to a designated account...there is accompanying bare trust documentation to demonstrate why we’re doing what we’re doing. It’s belt and braces but I think where HMRC are concerned that can sometimes be necessary.
Documentation will remain key here and the onus would appear be on the family to maintain it.
I don’t think that the provider (Fidelity in this case) can be relied upon to lend weight to the view that a bona fide bare trust exists - although these days, they do have a specific application form where the full details of the beneficiary can be recorded.
Our accounts were set up some time ago, possibly before this form was in use, but the provider wouldn’t really be obliged to keep copies of the original application forms as I understand it beyond 5yrs in any case.
Fidelity have stipulated that the proceeds must be paid out to one of the two account holders as they don’t hold details of the beneficiary, other than via the account designation which includes part of their name.
This suggests that the account may be considered ‘revocable’ which would go against any claim that there was a trust...
We’re talking about fairly small amount here but they add up as there are 10x.
I am hoping that the fact pattern is strong enough to support the existence of a trust arrangement, but dont’t know if HMRC would ever want to test that to destruction, given the modest amounts at stake.
I’m left with the feeling that perhaps the product wasn’t entirely suitable as we are left with this uncertainty and perhaps funds should be moved into Junior ISAs etc.
I don’t think that the provider (Fidelity in this case) can be relied upon to lend weight to the view that a bona fide bare trust exists - although these days, they do have a specific application form where the full details of the beneficiary can be recorded.
Our accounts were set up some time ago, possibly before this form was in use, but the provider wouldn’t really be obliged to keep copies of the original application forms as I understand it beyond 5yrs in any case.
Fidelity have stipulated that the proceeds must be paid out to one of the two account holders as they don’t hold details of the beneficiary, other than via the account designation which includes part of their name.
This suggests that the account may be considered ‘revocable’ which would go against any claim that there was a trust...
We’re talking about fairly small amount here but they add up as there are 10x.
I am hoping that the fact pattern is strong enough to support the existence of a trust arrangement, but dont’t know if HMRC would ever want to test that to destruction, given the modest amounts at stake.
I’m left with the feeling that perhaps the product wasn’t entirely suitable as we are left with this uncertainty and perhaps funds should be moved into Junior ISAs etc.
Either a bare trust exists or it doesn't - however rudimentary the documentation.
From the Fidelity platform point of view the beneficiary doesn't exist. They are dealing simply with a joint investment account in the name of the two trustees and will obviously not take instructions from or pay out money to anyone else.
From HMRC point of view the trustees do not exist, everything in the bare trust is taxed as personal property/income of the beneficiary.
Which takes us back to the beginning - either a bare trust exists or it doesn't, and to prove its existence there will usually be some form of documentation. (A bare trust may be able to exist without documentation but it wouldn't be easy to prove without other good evidence.)
Anyone involved in operating a bare trust needs to keep clear records to show what belongs to who. Often this can helped by running accounts (bank etc) for bare trust property which are completely separate from your own personal accounts.
From the Fidelity platform point of view the beneficiary doesn't exist. They are dealing simply with a joint investment account in the name of the two trustees and will obviously not take instructions from or pay out money to anyone else.
From HMRC point of view the trustees do not exist, everything in the bare trust is taxed as personal property/income of the beneficiary.
Which takes us back to the beginning - either a bare trust exists or it doesn't, and to prove its existence there will usually be some form of documentation. (A bare trust may be able to exist without documentation but it wouldn't be easy to prove without other good evidence.)
Anyone involved in operating a bare trust needs to keep clear records to show what belongs to who. Often this can helped by running accounts (bank etc) for bare trust property which are completely separate from your own personal accounts.
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