Question
What's the difference between 'assigning an account', 'designating an account' or putting the account into trust for a grandchild?Answer
These options exist because children are not allowed to hold most investments in their own name until age 18 (16 in Scotland). The restriction doesn't apply to savings accounts, although banks and building societies typically impose their own conditions on when an account can be held in the child's name, e.g. age 7.
Let's start with 'putting in trust' first, as it tends to be the best option. The trust is invariably a 'bare' trust - the simplest type of trust. This means assets are held in the name of a trustee(s) (e.g. parent/grandparent) for the benefit of a beneficiary (e.g. child/grandchild). The beneficiary receives all gains and income, on which they're personally taxable, and has the right to take legal ownership of the asset(s) at age 18 (16 in Scotland).
In other words, a grandparent can give money to a grandchild and for all intends and purposes the grandchild owns it, although it can't officially be held in their name until they reach age 18. This means the money is also treated as a gift for inheritance tax purposes, hence will fall outside of the grandparent's estate provided they live for at least 7 years after making it.
Setting up a bare trust requires a simple form, usually provided by the investment company concerned. More details in my earlier answer here.
Banks and building societies also use some form of simple trust like this when opening an account for children who are below the minimum age they're allowed to hold it in their own name.
A designated account means the money remains the grandparents, but they've flagged that it's intended to pass to the grandchild at age 18. This means the money continues to belong to the grandparent, hence is taxed as theirs and doesn't fall outside their estate for inheritance tax purposes. Setting up a designated account usually just means adding the child's initials to the application form. While very simple and flexible (the grandparents aren't obliged to hand over the money in future), it may not be very tax efficient, especially for larger sums.
Assigning an account usually refers to policies with life insurance companies, meaning that the policy is legally transferred from one person to another. It can be useful when a grandparent owns an investment bond that would trigger a large tax bill if surrendered. .Provided they're happy to give it to someone else (aged 18 or over), the bond could be assigned accordingly, potentially saving tax if the new owner is in a lower tax band.
In practice I'm sure there's quite a lot of confusion surrounding designated accounts and bare trusts, with many people using the former thinking they're not liable to tax. I suspect HMRC generally turns a blind eye, as it's hard to police and the sums usually small, but personally I'd use a bare trust where possible.
What's the difference between 'assigning an account', 'designating an account' or putting the account into trust for a grandchild?Answer
These options exist because children are not allowed to hold most investments in their own name until age 18 (16 in Scotland). The restriction doesn't apply to savings accounts, although banks and building societies typically impose their own conditions on when an account can be held in the child's name, e.g. age 7.
Let's start with 'putting in trust' first, as it tends to be the best option. The trust is invariably a 'bare' trust - the simplest type of trust. This means assets are held in the name of a trustee(s) (e.g. parent/grandparent) for the benefit of a beneficiary (e.g. child/grandchild). The beneficiary receives all gains and income, on which they're personally taxable, and has the right to take legal ownership of the asset(s) at age 18 (16 in Scotland).
In other words, a grandparent can give money to a grandchild and for all intends and purposes the grandchild owns it, although it can't officially be held in their name until they reach age 18. This means the money is also treated as a gift for inheritance tax purposes, hence will fall outside of the grandparent's estate provided they live for at least 7 years after making it.
Setting up a bare trust requires a simple form, usually provided by the investment company concerned. More details in my earlier answer here.
Banks and building societies also use some form of simple trust like this when opening an account for children who are below the minimum age they're allowed to hold it in their own name.
A designated account means the money remains the grandparents, but they've flagged that it's intended to pass to the grandchild at age 18. This means the money continues to belong to the grandparent, hence is taxed as theirs and doesn't fall outside their estate for inheritance tax purposes. Setting up a designated account usually just means adding the child's initials to the application form. While very simple and flexible (the grandparents aren't obliged to hand over the money in future), it may not be very tax efficient, especially for larger sums.
Assigning an account usually refers to policies with life insurance companies, meaning that the policy is legally transferred from one person to another. It can be useful when a grandparent owns an investment bond that would trigger a large tax bill if surrendered. .Provided they're happy to give it to someone else (aged 18 or over), the bond could be assigned accordingly, potentially saving tax if the new owner is in a lower tax band.
In practice I'm sure there's quite a lot of confusion surrounding designated accounts and bare trusts, with many people using the former thinking they're not liable to tax. I suspect HMRC generally turns a blind eye, as it's hard to police and the sums usually small, but personally I'd use a bare trust where possible.
Read this Q and A at http://www.candidmoney.com/askjustin/809/difference-between-designated-accounts-and-bare-trusts
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