Bare trusts are a tax-efficient way for “anyone except a child’s parents” to give children money, says Rosie Murray-West in The Daily Telegraph. If you are a parent, once children earn more than £100 interest on savings, it’s taxed at your marginal rate.
A bare trust is “a way of owning something on behalf of a child”. Once set up, the money or investments in it are seen as the child’s from a tax perspective. Any income tax or capital gains tax (CGT) liability is set against the child’s allowances – £7,475 (personal allowance) and £10,600 (CGT exemption) for 2011-2012.
This could be useful from an inheritance tax (IHT) perspective. The trusts are treated as potentially exempt transfers (PETs) after seven years, which means they are IHT-free. Also, each individual can make gifts of £3,000 a year, and regular gifts out of your after-tax income are also exempt from IHT, provided they do not affect your standard of living.
Once the trust has been set up, you can choose as many trustees as you want, including the child’s parents. The downside is that you cannot access the money at any time or revoke it, and the child has full legal control over the money when they turn 18.