My mother has just sold her house and proposes renting something for about 12 months or so while looking for a replacement home. During this time, my mother proposes placing all the sale proceeds into her three grandchildren’s bare trust dealing accounts. Would this cause a tax liability on the amounts deposited, or would this only cause a tax liability on any income or growth of the monies placed in the grandchildren’s bare trust dealing accounts? After about one year my mother plans on withdrawing all the funds from the grandchildren’s bare trust dealing accounts and reinvesting them in a home in which she and the grandchildren will live. Would this qualify as benefiting the grandchildren under rules regarding bare trust dealing accounts as they will be living in a house that they will also ultimately inherit? Would the above qualify as being for the benefit of the grandchildren if the funds in the bare trust were used to buy a home where the grandchildren will benefit? If so, would there be any tax consequences that would impact the capital placed in the bare trust dealing accounts?
Arthur Weller replies:
If your mother puts money into a bare trust for her grandchildren, this is a gift to them, a potentially exempt transfer (PET) for inheritance tax purposes, with no immediate tax consequences. Consequently, any profit/gains while in the trust will be attributable to the grandchildren. Regarding investing the money after a year in a property, this is more of a legal matter. I think it makes a fundamental difference whether the house is in the names of the grandchildren only, or only in the name of your mother, or both. Even in a case where the property is bought in the names of the grandchildren only, there is a possibility that if your mother occupies the house together with the grandchildren, HMRC could argue that this is a gift with reservation, or possibly is caught under the pre-owned asset rules. See the example in HMRC’s Inheritance Tax manual.