I would like to set up a bare trust for the benefit of my two grandchildren until they reach 18. They are currently aged seven and nine.
I would invest £50,000 for each child, with one of my daughters as trustee. I originally thought of an investment trust. However, judging by my own investments, I think I might be pushed to beat some of the rates available on children’s savings accounts. On the downside, savings accounts would need to be changed each year to maintain the best rates.
I can see that some providers will take care of investment bare trusts, at a cost. The trust deed would empower the trustee to choose the best savings account available with the ability to switch to investment trusts, if and when necessary.
The bare trust you describe is an absolute gift to your grandchildren but, since they are both minors, the money must be held by trustees or a trustee until they reach the age of 18. A gift by a grandparent to a grandchild is good tax planning and can provide the grandchild with a useful lump sum for tuition fees or a deposit for their first home.
In this case, the money will need to be held for a number of years before it can be taken over by the grandchildren. It is wise for the trustee to try to grow the money or at least counteract inflation as far as possible. Indeed, your plan to be proactive in investing the money is sensible.
Bare trusts will often be set up using specifically drafted trust documents naming the trustees, the terms and the administrative provisions. This is likely to include investment provisions and may also specify that the money can be used before the children turn 18 for their education and maintenance.
It is not possible for me to produce a bespoke trust document for you without you seeking legal advice. However, I want to draw your attention to provisions existing in statute that cover investment.
If you wish to get guidance as a trustee about how you should invest (from a legal perspective rather than financial) and the extent of your powers, you should refer to the Trustee Act 2000, clause three, the ‘General Power of Investment’, which covers investments outside investment into land. It states that trustees may make any kind of investment that they could make if they were absolutely entitled to the assets of the trust. This provides very wide powers but must be balanced against the need for trustees to act in the best interests of the beneficiaries and not to invest recklessly.
This is assisted by clause four of the act, which sets out standard investment criteria. The main thrust of this clause is to make sure that the proposed investment is suitable for the trust. Investment in land is dealt with by clause eight of the act, which allows trustees to acquire freehold or leasehold land, bearing in mind clauses three and four.
It is an amazing thing to be able to pass money down to the younger generation and should be encouraged. However, when dealing with money being held for children it is always important to get advice, consider the parameters of the Trustee Act 2000 and make sure investments are regularly reviewed to ascertain their suitability.
What is a bare trust?
A bare trust is a relatively straightforward form of trust where the beneficiary – the person who will benefit from the trust – has an immediate right to both the capital in the trust and the income generated by that capital.
This form of trust is often used to pass money on to children. The trustees are responsible for managing the capital but have no say over when the beneficiary can take it.
With children, this means that as soon as they turn 18, they can access their trust and ask to have it transferred to them.
Income tax is levied on any income received from the trust and capital gains tax is also due on the sale of any assets held within the trust. The beneficiary of the trust has to pay the tax.
The capital held within a bare trust belongs to the beneficiary as soon as the trust is set up. This means that the capital placed into the trust is classed as a potentially exempt transfer when it comes to inheritance tax.
This means that, as long as the person who put the capital into the trust lives for seven years after the trust has been set up, it won’t count as part of their estate for inheritance tax purposes. If they die within seven years of setting up the bare trust, the contents would count as part of their estate and inheritance tax could be due.
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