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Bare Trusts - can HMRC be correct?

In January this year STEP alerted the tax profession to a new interpretation by HM Revenue & Customs of the tax treatment of bare trusts for minor children. This was followed by a paper in February by the ICAEW covering the same concerns. These concerns have been brought about by changes in the legislation for trusts introduced by last year’s Finance Act
According to the ICAEW if HMRC’s analysis is correct:: 

  • A lifetime gift to someone who is unable to hold the assets for himself will be a chargeable lifetime transfer, rather than a potentially exempt transfer.

  • The property will be subject to ten-yearly and exit charges

  • If the child dies, the trust will no longer be treated as part of their estate for IHT purposes but there will be a exit charge where someone becomes absolutely entitled under the intestacy rules
  • When the minor child reaches age 18 (or in Scotland 16) or marries or enters into a registered civil partnership, ie his or her incapacity to own assets comes to an end, there will be an exit charge

This would have a huge impact on families, or godparents, who wish to establish a bank account or share portfolio for a child and have already used their nil rate bands or want to make a gift in excess of the nil rate band.

Worse still, there will be cases where significant gifts to minors have been made since the FA 2006 rules took effect, which was on 22 March 2006, but where the donors will be unaware that the tax implications of their gifts have potentially changed.

Both STEP and ICAEW have written to HMRC but in the meantime the advice must be not to make any significant gifts to minor children until HMRC have clarified the position.



Date: 28th February, 2007
Author: Lisa Spearman


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