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My wife and I set up bare trusts for each of our grandchildren shortly after they were born. Under advice from our financial adviser, we purchased holdings in two unit trusts, Fidelity Special Situations and Schroder Income, which both accumulated dividends. The holdings stand in joint names, designated with the initials of each respective grandchild.
Our eldest grandchild will be18 in July, and the issue arises of closing the trust and transferring holdings to her sole name. My understanding is that the transfer of assets should not be subject to capital gains tax since the child is already deemed to be the beneficial owner, but I would be grateful for your clarification on this point. Also, which practical steps will be required to take to transfer the holdings from our joint names to our granddaughter?
Christopher Groves, partner at solicitors Withers LLP, says that you are correct in saying that your granddaughter is already deemed to be the owner of the assets for tax purposes, so no charge to capital gains tax will arise. When she sells her shares, the taxable gain will be the growth in value since you first purchased the shares for her, not from when they were transferred to her.
Similarly, there is no charge to Stamp Duty Reserve Tax, which can apply on the surrender or transfer of shares on changing the registered owner.
For inheritance tax purposes, you and your wife will have been treated as making gifts to your grandchildren when you established the bare trusts for them, rather than when they receive the funds. This means they will not have to be included in your estate for inheritance tax purposes if you die within seven years of the transfer to your granddaughter – only if you die within seven years of the original funding.
For income tax purposes, you purchased accumulation units, which meant that the dividends were automatically reinvested in the funds. Those dividends were still taxable as the income of beneficial owners at the time they were paid, even though they are not received as cash. However, basic rate taxpayers do not have any further liability for income tax on such dividends beyond the tax credit which is deemed as received with the dividend when it is paid.
Although it is not the case for you, it is worth noting that if parents – as opposed to grandparents – make provision for their children in the same way, any income accruing to their children while they are under 18 is taxable on the parents as if it were their income.
Since November 2011, it has been possible to establish a Junior Isa for minors in which investment returns can be received tax-free regardless of who provided the funding. There is currently an investment limit of £3,720 in any tax year.
Your granddaughter may wish to consider using her holdings to fund an adult stocks and shares Isa, with a limit of £11,520 this tax year. She cannot transfer assets directly into an Isa, so she will need to sell the existing holdings and put the cash received into the tax wrapper – a process known as “bed-and-Isa”. Many stockbrokers will help her do it.
Selling the existing holdings will trigger any capital gains tax due, although her annual capital gains tax exempt amount – £10,600 this tax year – should ensure that no tax will actually be due on the transfer, unless she has other taxable capital gains in the year.
To transfer the shares to your granddaughter, if the trusts are held directly in your name, you should contact Fidelity and Schroders to arrange the transfers – the contact details will be set out on your annual statement. If they are held instead by a nominee service, contact the nominee who will be able to arrange the transfer. It may be necessary for you to complete a stock transfer form.
The advice given is specific to the questions posed. Neither the FT nor the contributors accept liability for any direct or indirect loss arising from any reliance placed on replies.
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