The examiners will frequently go outside the remit of the usual trust arrangements and discuss variations to the general trust theme – both in the AF1 exam and AF5 exam where trust arrangements are examined regularly.
The subject of trusts for minors or more vulnerable beneficiaries is one of the areas that has been explored in the past. In this article I briefly compare bereaved minor trusts and 18-25 trusts and their relative tax treatment. This is one which is good to know.
Trusts for bereaved minors
For a trust to be regarded as a trust for a bereaved minor, either set up as a result of a will or through the rules of intestacy, the bereaved minor will have to become absolutely entitled to the trust property at age 18. A bereaved minor is a person who has not yet reached age 18 and at least one of whose parents has died. A parent includes a step-parent.
A bereaved minor trust can only be created by parents for the benefit of their own children (or stepchildren). Any funds left over for the benefit of say, grandchildren will create a Bare Trust or a Relevant Property Trust.
Age 18 to 25 trusts
Age 18 to 25 trusts will also be set up as a result of will (or through intestacy law) and again will only be able to be established by parents for their own children or stepchildren. They most obvious difference between these and trusts for bereaved minors relates to when the beneficiary becomes entitled to the trust’s assets which will be at any time between ages 18 and 25.
Tax treatment
The income and capital gains tax treatment of both these types of trust will be in accordance with the standard tax treatment of trusts i.e. depending on the type of trust – bare or relevant property. However, a bereaved minor counts as a “vulnerable beneficiary” under trust law and it will therefore be possible (subject to completion of the relevant declaration to HMRC for each vulnerable beneficiary) for income and capital gains to be “effectively” taxed at the beneficiary’s rates and not those of the trust.
Inheritance tax
Here there is a significant difference between the two types.
With a trust for a bereaved minor, there will be no inheritance tax charge during the life of the trust and no further tax on the passing of assets to the child at age 18 when they become absolutely entitled.
With an 18-25 trust, there will likewise by no tax during the trust’s lifetime or if assets are distributed at 18.
However, if assets are passed between the ages of 18 and 25, then there will be an exit charge subject to a maximum rate of 4.2% of any relevant assets above the nil rate band.
For both the AF1 Personal Tax and Trust and AF5 Financial Planning Process exams (depending on the case study, of course) this is a topic worth knowing.
