Ask Money: who’s in the money?

Patrick Connolly at Chase de Vere helps a reader with a question about inheritance.

When my father died recently, I was due to inherit some of his estate. However, my brother and I, as joint executors, have agreed to enact deeds of variation so that investment holdings can be passed directly to our children.

Each of my two children, who are minors, has a First Steps Plan held with Alliance Trust Savings, essentially as a bare trust. The only money paid into these children’s accounts has been from their grandfather, not their parents. Thus, any income arising from them has been treated as the children’s, with the income nil-rate band applying. Now these two accounts are housed on the interactive investor platform and are in ‘trading accounts’ with ii. Although they are clearly designated with each child’s name, they are under joint account holders consisting of my wife and myself.

Are the children no longer allowed to have their own income streams? And if any further income accruing is first treated as theirs rather than their parents’, should more of their grandfather’s holdings be transferred into these same accounts? I am being given conflicting advice: I am told the holdings can be passed on to my children but also that any income arising would be treated as ‘mine’.Ian Jenkins, by email

Patrick Connolly at Chase de Vere replies: If the initial investments with Alliance Trust were set up as a bare trust, any tax liability from income or gains will usually fall on the beneficiaries, in this case your children. However, the children would be able to use the personal income tax allowance and capital gains tax exemption to offset that liability. The exception to this is where a parent makes a gift for their children and the income exceeds £100 a year, in which case the liability falls on the parent. As the money came from the children’s grandfather, this £100 rule wouldn’t apply.

When assets are held in a bare trust, although they are held in the name of the trustees, the trustees do not own them; they are instead held for the benefit of the specified beneficiary, in this case your children. However, your children cannot take legal ownership of the assets held in a bare trust until they reach age 18, or age 16 in Scotland.

There are important differences between bare trusts and designated accounts. This is the key factor. It is the creation, or not, of a bare trust that is the issue. You need to find out if the accounts with interactive investor are set up as a formal designation, which would be a bare trust, or an intended designation, which wouldn’t be binding and would mean that the assets wouldn’t automatically be passed to your children at age 18.

If the new accounts are set up without a formal designation, with you and your wife as joint account holders, even though it is indicated that the assets belong to the children and you intend to hand it to them when they reach 18, you are not obliged to do so. In this scenario, given that the account would remain under your control, you and your wife would be responsible for any income and capital gains tax liability, and the assets would be included in your estate for inheritance tax purposes.

If you need help with a tax, pension or financial planning problem, please email: moneyobserver.ed@moneyobserver.com

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