How to help the younger generation is an increasingly common concern for many parents and grandparents.
University fees, high housing costs, and pension contributions all place pressure on young people’s finances today, with the upcoming generation arguably facing the most difficult financial outlook for a generation.
Many parents and grandparents want to help with these issues by setting aside money for when the time is right. That naturally leads to questions around tax, and how best to arrange your affairs. People looking to pass on assets to the next generation may wish to consider tax efficient structures like a Junior ISA (JISA) or bare trust. A bare trust is often used to pass assets to young people and is structured in a way that the assets are held in the name of the trustee (typically a parent or grandparent) until the beneficiary reaches a certain age, often 18, or 16 or over in Scotland.
Naturally, there are differences between these two. A JISA has an annual allowance of £9,000, with anyone able to contribute towards it. At present money can be paid into a JISA until the child is 18 but this is being reduced to 16 from the start of the 2024/25 tax year. This move is aimed at removing what is in effect a larger allowance for people aged 16-18, as up to £20,000 can be paid into an ISA and £9,000 into a JISA under the present conditions up until 5th April 2024.
There is no limit to the amount that can be settled in a bare trust. Bare trusts can also have adult beneficiaries, though neither JISAs nor bare trusts allow for a change of beneficiary.
Assets in a JISA are completely exempt from income or capital gains tax, but these taxes do still apply in bare trusts. If the money in a bare trust comes from the parents, then the assets are taxed as though they belong to the parents. If a grandparent contributes money to a bare trust, the assets are taxed as belonging to the grandchild. Therefore, this usually leads to a lower tax burden, unless you have an exceptionally precocious child!
Contributions to both bare trusts and JISAs are treated as potentially exempt transfers for the purposes of inheritance tax, provided the donor survives for seven years from the date of the gift.
Money can be taken out of a bare trust while the beneficiary is still a minor, provided it is then used for their benefit, for example to help with school fees. Money cannot be taken out of a JISA until the beneficiary reaches the age of 18, but they can take control of the account from the age of 16.
The most common concern with JISAs or bare trusts is what happens when a child reaches the age of 18. At this point, the child will have access to, and control over, any assets, with there being little anyone can do if the money is going to be squandered. The trustee of a bare trust has a duty to tell the beneficial owner of the trust’s existence at the age of 18 and, given that any income should be reported on the beneficiary’s tax return, it is virtually impossible to pretend that the trust does not exist.
There are alternatives to bare trusts and JISAs, including just setting aside a proportion of your own savings for your children or grandchildren. There are also more complicated trust and inheritance arrangements, but these can come with higher legal fees.
This material is not tax, legal or accounting advice and should not be relied on for tax, legal or accounting purposes. Quilter Cheviot Limited does not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting adviser(s) before engaging in any transaction.
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