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Climb down on bare trusts for children

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28th Mar 2007
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If you are still feeling confused as to what exactly the changes to trust taxation announced in budget 2006 mean in practical terms, then don't take it to heart. HMRC are still in a conundrum themselves as evidenced by the latest episode of the saga of the FA 2006 changes concerning children's trusts.

The CIOT and ICAEW recently discovered that HMRC had formed the option that bare trusts for minor children were actually accumulation and maintenance trusts and so any transfer into such a trust was therefore a chargeable lifetime transfer. We detailed back in February the scope of the problems that this view might cause. The two tax bodies gave the following advice: "For the time being, the safest course of action is not to make any significant gifts to minor children until HMRC have clarified the position.”

HMRC have now confirmed in the light of the further advice that they have received, that a lifetime gift on trust for a minor absolutely, whether or not the provisions of s.31 Trustee Act 1925 are excluded, is a potentially exempt transfer.

The CIOT say that they are pleased that HMRC have now confirmed that an absolute trust of this kind is not a settlement for inheritance tax purposes. HMRC now accept that in the case of a bare trust where the beneficiary has an immediate and absolute right to both capital and income, and only the beneficiary’s minority will prevent such beneficiary from being able to require the trustees to convey the trust property to him. The trust property, (including any accumulations of income if section 31 applies), will form part of the beneficiary’s estate for IHT purposes.

The IHT Manual is to be updated shortly.

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