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Expert answers: I want to open a trust fund for my grandchildren, what are the tax implications?

Readers question: I have a limited company and I have taken 1% dividend for my grandchildren to pay for their school fees. I have opened a trust account where this 1% will be put into so let’s say the cost of the fees is £17,000 per annum, how much money do I need to transfer into this trust fund? Also how much corporation tax do I need to pay on this transfer?

Expert answers: I want to open a trust fund for my grandchildren, what are the tax implications?

Experts answer: Expert David Murphy from Grenfell James Associates answers this question.

The query probably creates more questions as it isn’t clear if the 1% is in relation to shares, but assuming it is:

Transferring shares

The transfer of shares into a trust is usually classed as a disposal for capital gains tax purposes, with the transferor treated as making disposal equal to the market value of the shares. This would usually cause a capital gains tax charge even though no proceeds have been received.

There are however reliefs available in the form of ‘holdover’. This effectively defers the capital gain until the later disposal of the asset, with the gain effectively passed on to transferee to pay tax on at a later date.

Tax for trust funds

Where a trust is involved the relief available is under s260 TCGA 1992. This relief is available where a transfer of value to a trust is ‘chargeable lifetime transfer’ (i.e. are immediately chargeable to Inheritance tax). Most lifetime transfers to trust are chargeable lifetime transfers so qualify for the capital gains holdover relief under s260 TCGA 1992.

This relief is not available however for Bare Trust arrangements, as any transfers to a Bare Trust are ‘potentially exempt transfers’. There would be a capital gains tax charge therefore on transfers of shares to a Bare Trust. A Bare Trust is a common arrangement for Grandparents and school fees.

Dividends – if the trust is a Bare Trust arrangement, then any dividends received are treated as that income of the grandchild. Thus the personal allowance and tax bands are used to calculate any tax due.

The tax rates for dividends in the tax year 2019/20 are:

Tax-Free Personal Allowance – £12,500 – 0%

Dividend Allowance – £2,000 – 0%

Basic rate band – (£12,501 – £50,000) 7.5%

Higher rate band – (£50,001 – £150,000) 32.5%

Additional rate band –  (£150,001 plus) 38.1%

If we assume that the income of £17,000 is for one minor with no other income, then the tax due would amount to £ 187.50. The limited company would effectively have already paid corporation tax on this money within its own corporation tax liability calculation for its financial year profit.

However further information would be required to advise further.

More on limited company shares and corporation tax.

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