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Bare trusts for minors

Assets in a bare trust are held in the name of the trustees. However, the beneficiary is entitled to their share of the trust assets once they attain the age of legal majority; this is age 18 except in Scotland, where it is age 16.

Chargeable gains under a bare trust are always taxed as the income of the beneficiary, irrespective of the beneficiary’s age.

The one exception is where the assets are placed under trust from parents for minor unmarried children. In this situation the parental settlement provisions will apply

So the revised tax position, as seen by HMRC, is:

  • If a bare trust was established by a parent, chargeable gains over £100 are taxed on that parent if the beneficiary is under the legal age of majority and unmarried
  • Chargeable gains that arise, in subsequent tax years, after a parental settlor’s death will be taxed on the beneficiary

Bare trusts established by grandparents or other persons will not fall foul of the parental settlement provisions, which will provide scope for using the minor beneficiaries’ personal allowances to offset chargeable gains.

For example, excess withdrawals or sub-policy (segment) surrenders could be taken from an international bond to fund school fees, ensuring that the resultant chargeable gain is within the minor beneficiary’s personal allowance. So no income tax will arise on the profit made.

An international bond is used in this example because there is no tax on the underlying fund (except for non reclaimable withholding tax on some equity funds) unlike a UK bond.

This briefing note has been prepared for professional adviser use only.

The information regarding taxation is based on our understanding of current legislation, which may be altered and depends on the individual financial circumstances of the investor. We recommend investors take their own professional tax advice.

This briefing note is also available as a PDF.

This website is for UK professional advisers only and is not approved for use by private customers.

Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

Canada Life International Limited and CLI Institutional Limited are Isle of Man registered companies authorised and regulated by the Isle of Man Financial Services Authority.

Canada Life International Assurance (Ireland) DAC is authorised and regulated by the Central Bank of Ireland.

Stonehaven UK Limited and MGM Advantage Life Limited, trading as Canada Life, are subsidiaries of The Canada Life Group (U.K.) Limited. Stonehaven UK Ltd is authorised and regulated by the Financial Conduct Authority. MGM Advantage Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority.