Using a bare trust
A Bare Trust is the technical term for an account that belongs to a minor but is controlled by an adult. It’s sometimes called a designated account. At 18, the child is able to request access to the whole fund without restriction.
You can also appoint other trustees to help manage the account by drawing up a trust deed. However, there is no requirement to do this and a simple trust is created automatically when you set up such an account.
Before 18, the adult makes the decisions about how the money is invested and agrees withdrawals.
As the money belongs to the child, they are responsible for any tax (with the exception of the parental settlement rule – see opposite). Setting up a Bare Trust can be very effective for grandparents, particularly those looking to reduce the potential IHT bill on their estate.
If you die within seven years of making a gift, then all or part of the value could be subject to IHT. There are two exemptions which are relevant if you are contributing to a savings plan for a child.
First, up to £3,000 a year can be gifted each year without any IHT liability. If you don’t use this allowance it can be carried forward to the next tax year, so a maximum of £6,000 can be gifted in this way.
There is a second exemption for ‘gifts out of income’. Provided a gift is part of your normal expenditure and does not affect your standard of living, it will not be subject to IHT. This is particularly useful for anyone setting up a regular savings plan for a child.
If you intend to rely on these exemptions it is very important to keep accurate records.
To read more on the best ways to help your children secure their financial future, download our new ‘investing for children’ guide.