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Use of Bare Trusts

Regardless of what may emerge in respect of the CTF it is worth remembering that ordinary “private trusts” in bare or nominee form already offer the opportunity to use the child&#39s (beneficiary&#39s) capital gains tax exemption each year regardless of who the settlor is – parent or otherwise. The parent could also be the trustee. These trusts are however caught by the income tax anti-avoidance rules in s660B ICTA 1988 where the income exceeds £100 gross in a tax year. Under this rule, where this income limit is breached all of the income is assessed on the parental settlor for a minor unmarried child. One method of avoiding this problem is to invest in non-income producing assets and focus on securing growth through capital gains.

Children cannot have stocks and shares ISAs but ordinary collectives (unit trusts, OEICs or investment trusts) held on bare trust for children can give the same capital gains tax advantages for gains up to the annual exempt amount. And, remember, taper relief also applies to reduce long-term gains.

An even easier way of ensuring that a child&#39s annual CGT exemption is fully used in connection with collective investments is for a parent to invest in, say, growth oriented collective investments, e.g. unit trusts or OEICs or investment trusts, that are designated for the benefit of the child. In this way a combination of taper relief and the annual exemption can ensure that over the long term no (or substantially reduced) capital gains tax is payable on gains. This could be an attractive way of funding for the increasing costs of further education. Clearly, as for all savings, the most effective results will be secured if investment can be made over a relatively long period.

Like the trust, the designated account route is one that necessitates a willingness to give up beneficial access to the investment used in the strategy from outset. The gift would normally be exempt for inheritance tax purposes or, to the extent it is not exempt, constitute a potentially exempt transfer.

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