Writing for Taxation magazine's Readers' Forum, BKL tax consultant Terry Jordan responds to a reader's query about reporting requirements for a bare trust.
'My client and her husband have recently moved out of a jointly-owned home which served as their only residence since its acquisition some decades ago. Upon doing so, my client executed a deed with the effect of gifting the beneficial interest in the property to her four minor grandchildren in equal proportions, whereas the grandparents hold the title as bare trustees. The only noteworthy clause within the deed is one that denies the right of the trustees to sell the property until all beneficiaries reach 20 years of age. The property was let to a third party shortly after the clients moving out, and it is expected to generate net letting income of some £15,000 a year going forward.
When considering the compliance obligations arising in this case, I understand that the grandchildren (aged 5 to 17) will be required to register for self assessment and declare the property income in a return to HMRC - although after using their personal allowances a liability to income tax is not expected. The disposal will be recorded in the clients' tax returns for this year with a full claim for relief on the disposal of an only or main private residence.
The clients' other assets are minimal and the estate is understood to be well covered by two nil rate bands for inheritance tax purposes. Guidance by HMRC (tinyurl.com/wmf8avbm) suggests that a bare trust does not require registration and I am not entirely clear as to additional requirements for the trust.
Do readers agree that, apart from dealing with the affairs of the beneficiaries, no requirements of reporting to HMRC arise in connection with the bare trust?' Query 19,835 - Gifter.
Terry Jordan's reply: There is no specific exclusion from registration for bare trusts.
'Gifter's clients have executed a deed transferring the beneficial ownership of their previous matrimonial home to their four minor grandchildren, apparently on bare trusts. In 2006, the then Labour government made significant changes to the inheritance tax regime as it applies to trusts. Since 22 March 2006, almost all lifetime transfers to trust have been immediately chargeable rather than potentially exempt transfers (PETs) with lifetime inheritance tax payable at 20% on the value transferred over any available nil rate bands. The trust property then falls into the relevant property regime with ten-year and proportionate or 'exit' charges. The exceptions are gifts to disabled persons' trusts and gifts on bare trust which remain PETs.
The essence of a bare trust is that the trustees are holding for the benefit of the beneficiaries who are usually under a disability, in this case they are minors and cannot give a valid receipt until they attain their majority (18 in England and Wales and 16 in Scotland). As long as the donors have not reserved a benefit in the property the gifts will fall off their inheritance tax clocks after the usual seven-year period and, if the values are substantial, taper relief would be available if they survive at least three years.
It is not clear where the donors are now living and we are told that their other assets are of minimal value. They will not apparently need the benefit of the residence nil rate bands and they would not, on the face of it, benefit from the downsizing provisions.
I do have a concern about the reference to the clause in the deed denying the trustees the right to sell the property until all the beneficiaries reach 20 years of age and whether in fact this really is a bare trust. IHTA 1984, s 43 defines 'settlement' as including property held in trust for any person subject to a contingency.
Gifter says that the disposal will be recorded in the clients' tax returns for this year with a full claim for relief on the disposal of an only or main private residence. HMRC's help sheet HS 283: Private Residence Relief (2021) says: 'If you meet all of these conditions [for relief], you will not have to pay capital gains tax on the disposal. You will not need to complete the capital gains tax summary pages of your tax return [tinyurl.com/589akeu6] if you've made no other disposals or chargeable gains and do not want to make any capital gains claims or elections.'
So far as registering the trust is concerned, HMRC's Trust Registration Service Manual at TRSM10030 states: 'There is no specific exclusion from registration for bare trusts. In general, if a bare trust is an express trust it should register on TRS. However, there are several exclusions that may apply to common bare trust arrangements. See TRSM23000 for more information on the trusts excluded from registration as a registrable express trust.
'Bare trusts are not required to register for taxable purposes, because any UK tax liability is incurred by the beneficiaries rather than the trustees.'
Once the grandchildren attain age 18 their ownership of shares in the property will affect their liability to the stamp duty land tax surcharge on the purchase of another property by any of them.'
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