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Bare Trusts – Income tax and Capital Gains tax

Wednesday August 2019

I am looking at gifting my child a sum of money. What are the income tax consequences if I use a bare trust to do so?

There is no definition of a bare trust in the income tax legislation. Put simply, a bare trust is one where the beneficiary has the absolute right to the assets and income, but the trustees are the legal owners effectively holding the property as nominee.

A bare trust enables a person to hold the investment in a trust for the benefit of the named beneficiary and, as trustee, keep an element of control over the investment if the named beneficiary is a minor. The bare trust could be as basic as a bank or building society trustee account in the name of the person who is holding the funds as trustee for the individual.

Income arising from the assets of the bare trust is normally taxable on the beneficiary. However, for bare trusts created on or after 9 March 1999 by parents for their minor child (under 18 and unmarried) where the income on the gifts between the said parent and beneficiary of the trust is £100 or more, the income is taxable on the parent (s629 ITTOIA 2005).

Under self-assessment, trustees of bare trusts do not have to complete tax returns, but the beneficiaries must, if required, declare bare trust income and gains in their personal tax returns and account for any income due tax or capital gains tax. If, however, bare trustees wish to make a self-assessment return of income, they may do so, but may not include capital gains or capital losses, such gains and losses must be notified by the beneficiaries in their personal returns (See HMRC’s Self Assessment Manual SAM123020). If the trustees and all the (adult) beneficiaries of a bare trust wish to report the income in this manner, they are required to notify the trust district dealing with the trust’s tax affairs, and to follow the same course consistently year on year. Either way, the obligation to notify HMRC of tax due on trust income and gains remains that of the beneficiaries (or their parents/guardians whilst they are unmarried minors).

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