View more on these topics

Danby Bloch: Gifting to the next generation

Making large gifts can lead to tax and other complications, so it is helpful to have an imaginative financial plan that overcomes many of the difficulties


Older and richer clients often want to make significant financial gifts to their grandchildren or other young relatives, with both familial feeling and estate planning considerations coming into play. The difficulty is that making large gifts can lead to tax and other complications, so it is helpful to have an imaginative financial plan that overcomes many of the difficulties.

How could this work for a reasonably large transfer? Ideally it should be a gift into a bare trust because of the in heritance tax advantages. It will count as a potentially exempt transfer and avoid the possibility of 10-yearly and exit charges and other complexities. The income tax position is simple and tax-efficient, especially if the donor is not a parent. But like Junior Isas, a bare trust opens up the potential danger of 18-year-olds getting their hands on more money than would be good for them.   

The good news is there is a special plan that uses a combination of the design of the investment vehicle and the structure of the trust that holds the investments to stop children getting their hands on too much money too quickly. The family enjoys the benefits of a bare trust without necessarily providing the early access for the child.

The trust funds can be used on anniversary dates during the child’s life – for example to help with school fees, university costs, or setting up home. The child cannot touch the money without the trustees’ agreement even after reaching the age of 18. The gift counts as a Pet and the funds are in offshore bonds, so until encashment have the same tax profile as an Isa (soon to be New Isa). The profits could well be subject to income tax (unlike a Jisa or Isa), but planning might well help minimise that possible liability.An important aspect of the plan is that it is conventional tax planning. It is not what might be called “full frontal” tax avoidance – or indeed  tax avoidance in any aggressive or even assertive sense. That is the view of the company that devised the plan – Canada Life International. Here is how the plan works.

Ringfencing access

The donor –  let us assume it is a grandparent – makes a gift of at least £50,000 into a bare trust that is almost entirely for a grandchild under the age of 18. There would be one trust per grandchild. Distinctive about the trust, however, is that 1 per cent of the trust fund is in favour of a responsible adult – probably one of the parents. So the child would not be able to wind up the trust once they reached the age of 18, because they would not have unanimity among the beneficiaries. The gift into the bare trust is a PET and so outside the grandparent’s estate after seven years and it avoids all the IHT and other complications of a discretionary trust. The drawback is that the beneficiaries cannot be changed – for example, if the grandchild dies.

Investment tax wrapper

The investment tax wrapper is a series of special single-premium fixed term policies written on the life of the beneficiary that pay out on death or on maturity. Each policy (and there can be up to 99 of them) has a fixed maturity date, which can be before or after the child reaches 18. It makes sense for some (or possibly) all of them to be fixed for those years when money might be needed for school fees. If the money is not needed at that time, the trustees can defer the maturity date of each policy to another fixed date – say when the child is in their early or mid 20s and needs money to clear debt, or buy a home, for instance. So there could be a series of maturity dates when the cash is paid out.

The profits on maturity of policies will be fully taxable on the beneficiary because it is a bare trust, even when the child is under 18, as long as the settlor is not a parent. This will allow the child to use their personal allowance – £10,500 from 2015/16. At that time the starting rate for the first £5,000 of savings income will also drop to nil. So a grandchild with just savings income from the trust could have profits in 2015/16 of up to £15,500 tax-free. The parental joint beneficiary with the 1 per cent interest could give it to the main beneficiary, although that could involve some (probably minor) tax consequences.

So a grandparent could make a tax-efficient gift to a grandchild, safe in the knowledge the recipient should be mature enough to receive it.

Mind you some people never grow up. But the final maturity date for the policies has to be before the child beneficiary reaches the age of 49, by which time Canada Life International believes they might be sufficiently mature or the grandparents might be safely deceased.

Danby Bloch is editorial director of Taxbriefs Financial Publishing


The Keys to your marketing

The personalised Key Guides series keeps your clients up to date with financial planning ideas across a range of life events. An annual subscription to 13 PDFs includes:

  • Pensions flexibility – the new rules
  • You and yours – estate planning
  • Investing for income when you retire
  • Workplace pensions and auto-enrolment

Investing for childrenUpdated quarterly, the Key Guides are a core component of your client marketing. To find out more, call Alex Broughton on 020 7970 4196




Partnership cuts 100 jobs in wake of Budget

Partnership is axing 100 jobs as part of a cost cutting exercise to save £21m a year. The company says the move follows a review of its cost base as it expects annuity sales to continue to remain low following the Budget. The job losses will affect Partnership’s London and Redhill offices. Staff entered into consultation […]


Govt ditches bank levy redesign plans

The Government has scrapped plans to redesign the banking levy after the industry warned the proposed new approach could see businesses exit the UK. Introduced in January 2011, the bank levy is a tax on banks’ balance sheets, chargeable at the end of a firm’s financial year. Originally set at 0.075 per cent of a […]

Greg Broomer 2

Survey looks at the challenges facing businesses post auto-enrolment

A survey conducted by Johnson Fleming at the Pension & Benefits Show 2014 highlighted the key challenges faced within organisations post auto-enrolment. The results showed that communicating the changes and the value of them to staff, and receiving timely data from the payroll provider proved to still be the most challenging aspects of managing an auto-enrolment scheme.


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm