Designated Accounts VS Bare Trusts
It is a good idea to encourage children to take an active interest in their savings and investments and they will normally be able to operate their own bank or building society account from around the age of seven. However, there are other types of investment which can be suitable for children, which are legally held on their behalf by adults until they have grown up. There are two main ways in which this can be done:
Designated Accounts
If you want to keep control over the money you have given to a child, such as a building society account or a savings plan, you can hold it in your own
name but ‘designate’ it in the child’s name or initials too. All you need to do is provide this additional information on the application form. This has the effect of ring-fencing the money for the child. However, the investment remains under your control and you will be liable for
any tax which may be payable.
Bare Trusts
If you want the money you give to be the child’s property, then the simplest way to do this is through a bare trust. The investments are still in your name but you hold them in trust on behalf of the child. They are treated as the child’s for tax
purposes, which can be particularly useful if you are likely to be making full use of your own annual capital gains tax allowance or are a higher rate taxpayer. When the child reaches 18, they will gain full control of the investments subject to the completion of the appropriate paperwork.
To set up a bare trust, it is advisable to complete a ‘declaration of trust’ form, which a good savings provider should be able to supply on request. This sets out your intention to ‘gift’ the investment to the child. The declaration must be sent to your local Inland Revenue
office where it will be stamped and then returned to you. You will need to enclose a cheque for £5 to cover stamp duty (correct at time of printing).
The Main differences between designated accounts and bare trusts:
| Designated Accounts |
Bare Trusts |
• The money is still yours but is designated for the child
• You are liable to tax on any income or capital gains
• You can decide when to hand the money to the child
• The money is counted as part of your total assets
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• You hold money in trust for the child
• The money is treated as the child’s for tax purposes
• At 18 the child gains control of the money
• The money is excluded from your estate total assets when calculating any inheritance tax due
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Other Types of Trust
If you would like to make a gift to a child but do not want them to gain control when they reach 18, you could put the money into another type of trust,
such as an accumulation and maintenance trust, where the trustees decide whether or not the beneficiaries receive any income or capital until they are aged 25, and even after that they may hold the capital back. Alternatively, you could use a general discretionary trust for greater flexibility. If you are considering setting up one of these trusts, you will need to consult a legal adviser.
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