It makes me weep that I need to discuss this. I genuinely do not believe that the government intended to make this bit as complicated as they did. The old (pre-2006) rules for gifts to minors, called the “A&M Trust” rules, were simple, secure and tax-favourable. So, everybody followed them, leaving gifts in wills “to those of my grandchildren who survive me and attain 21” or suchlike. Very straightforward. Nobody thought of creating “bare trusts” (whatever they are) or leaving their children “intermediate income” (whatever that is), because although those options existed in theory, frankly why would you want to do them, and who needs to think about those things, anyway? Well, now you do.
I think the treasury felt that some very rich people with clever lawyers were taking advantage of the A&M Trust rules, so, using a sledgehammer to crack a nut, they simply abolished them. Then, they realised that they needed at least two new statutory regimes to partially replace them. So now, you need to consider a string of options, and to trade-off simplicity -v- security -v- tax-favourableness. Instead of the one option you had before (where the only choice you really had to make was whether the beneficiaries inherited at 18 or 21 or 25, and where even that decision didn’t affect the tax position) you now have to choose between:
a. Relevant Property Trust. (Example: “to those of my grandchildren who survive me and attain 21”.) Simple, secure, tax-unfavourable. This is the simple option I mentioned above, the kind that would previously have fallen squarely within the A&M Trust rules. This is still unquestionably the best option for those whose estates aren’t in the tax net anyway – indeed, if you aren’t in the IHT net this is the only option I would seriously discuss with you, if you consulted me about a will. The tax disadvantage, however, is that they are taxed as discretionary trusts, suffering ten-year charges and exit-charges. The maximum rate of any charge is 6%, so what I often find is that people whose estates are taxable nevertheless work their way through the following options with me, but then decide to come back to this one: taking the view that the tax charges may be a reasonable price to pay for the simplicity and security of it.
b. Bereaved Minor’s Trust. (Example: “to those of my children who survive me and attain 18”.) Simple, insecure, tax-favourable. This is a statutory regime, available only in the wills of the parents of the child concerned, and only where the minor gets their money outright, with no strings attached, at 18. And, really, that’s what I mean by “insecure” in these examples – the minors in question taking absolute control of their inheritance the moment they reach 18, whether or not they are mature enough to handle the amount of money involved. The tax advantage is that there are no ten-year charges or exit-charges.
c. 18 to 25 Trust. (Example: “to those of my children who survive me and attain 21”.) Simple, secure, tax-middling. This is another statutory regime, available only in the wills of the parents of the child concerned, and only where the minor gets their money outright, with no strings attached, at an age between 18 and 25. Gifts of this kind become relevant property trusts upon the minor in question reaching 18. Therefore there cannot be a ten-year charge (because there are less than ten years between someone reaching 18 and the same person reaching 25) and the maximum possible exit charge is 4.2% (because exit charges are calculated by reference to the number of years elapsed before the next ten-year charge would happen: in this case there are seven years between ages 18 and 25, and 7/10ths of the maximum 6% is 4.2%).
d. Bare Trust. (Example: “to those of my children who survive me absolutely”.) Simple (in theory), insecure, tax-favourable [unless the minor dies]. In this case, the gift to the minor is “absolute”, so he or she owns the money outright, even if he or she is only an infant. This may seem to be the ultimate in insecurity, although in practice trustees do actually have to look after the money and the child cannot demand it from them until attaining majority, at 18. The only reason to consider this is the tax consequence: the money actually belongs to the child, so the trust isn’t truly a trust at all, and isn’t taxed as one. Therefore there can be no ten-year charges and no exit charges.
e. IPDI. (Example: “to pay the income to those of my children who survive me, from the date of my death, and to pay the capital to each of them when he or she attains 21”.) Complicated, secure as regards capital, tax-favourable [unless the minor dies]. The idea of an IPDI is that if you grant someone a right to income, by a trust in a will, from the date of death, then that trust is taxed in tandem with the beneficiary’s estate (and not as a relevant property trust). The tax upside is that there are no ten-year and exit charges. But the assets are taxed in tandem with the minor’s estate, so if the fund is big enough it suffers 40% tax on the minor’s death.
But just to clarify: although I have described some of these options as “tax-favourable” and “tax-unfavourable” none of them avoids the IHT on the death in question (and the old rules didn’t do that either). Leave money to a child or a grandchild (indeed, actually, to anyone except a spouse, civil partner or charity) and you pay IHT on it. The only question we are discussing in this section is whether there might be yet further IHT on the fund before the minors receive their share.
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