The bare facts for tax-saving parents - Money - The Independent

The bare facts for tax-saving parents

YOU CAN save hundreds of pounds if you do not waste your children's tax allowances.

If you give money or an asset to your children, the taxman frequently regards it as still your property and you will be taxed accordingly.

However, everyone - including children - has his or her own tax allowance. If you want to give money, shares, unit trusts or investment trusts to children, consider setting up an irrevocable 'bare trust'.

This bare necessity of tax life is a simple one-page trust deed. Any firm of solicitors should be able to knock one up at the drop of a word-processor. In simple terms it is a mere nominee form.

Liz Cohen, personal tax partner with the solicitors Nabarro Nathanson, says: 'If you give shares to your children under a bare trust, the income arising, such as dividends, is treated as the child's own for income tax. They have their own allowance of pounds 3,445 to set against it.

'On the capital gains tax side, if the shares are sold for a profit the gain is treated as the child's own gain. The pounds 5,800 annual exemption is available for the child to absorb the gain.

'The shares should also come out of your estate for inheritance tax purposes if you live for seven years from the date of the gift.'

You can even be the trustee of the trust. Sounds too good to be true, doesn't it? But, as with everything concerning children, there is a price to pay.

The trust is irrevocable. Once you have decided to part with your shares or unit trusts you cannot have them back again.

The fund also has to accumulate until the child is 18. Miss Cohen says: 'It cannot be spent for the benefit of the child, for example on school fees or holidays. If you do, the anti-avoidance legislation comes into effect and the money is treated as belonging to the parent.'

When the children reach 18 there is no means of stopping them having access to the fund. If a child has gone wild on drugs and you have put pounds 100,000 into a bare trust you are powerless to hang on to the money.

Bare trusts, therefore, are not the place to stash away a mass of cash. However, they are a very good way to provide a little - little being the operative word - nest egg, for example when the children go to university.

Grandparents can also benefit from using a bare trust and they can spend the money for the child's benefit without getting caught by the avoidance legislation.

A booklet, 101 Tax Saving Hints, is available from the Publications Department, Nabarro Nathanson, 50 Stratton Street, London W1X 5FL, price pounds 4.50.

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