Tax liability for child's bare trust

[Larkspur]

Approximately 12 years ago my husband's parents left a small sum of money to each of our two children which my husband decided to invest in a bare trust (shares) account. In 2023 my husband's income tipped him into the higher rate tax band so he decided to remove himself as a trustee and add me (self employed non tax payer) as the sole trustee. It was only when my eldest child recently turned 18 and wanted to access and close the bare trust account (to ISA the shares) that I discovered the bare trusts should have been registered with the TRS. I have now registered both child's bare trust accounts but was unsure how to answer the tax liability question. Each bare trust has received just over £500 in dividends this current tax year. The Gov.uk website seems to suggest as a trustee I need to pay income tax on the trust income by filling out a Trust and Estate Tax Return and give the settlor (my husband) a statement of all income and rates of tax charged on it and then the settlor informs HMRC about the tax the trustee has paid on their behalf when filling out their SA tax return (which has already been submitted months ago). A quick look at an example of a Trust and Estate Tax Return form online and it might as well be written in hieroglyphics for all I understand it! Have I interpreted the rules with bare trusts correctly - do I need to complete a Trust and Estate Tax Return? Also, am I likely to be fined for late registration of the bare trusts with the TRS?
Any help or guidance in this matter will be much appreciated.

[AGoodman]

You have a few misunderstandings here.

- as a bare trust, the income/gains belong to the children. It is not a "settlement" (a term used in the tax legislation) but closer to a nominee arrangement where the trustee is nominee for the children. So far as tax is concerned, the trust/trustees are ignored and transparent.
- accordingly, there was no need for your husband to retire as trustee, the income/gains do not accrue to the trustees for tax purposes.
- the trust is registrable as "non-taxable" as the trustees of a bare trust are not taxed on its income/gains.
- your husband is NOT the settlor as the money did not derive from him. Stating that he is the settlor for TRS purposes might trigger HMRC to think he has tax liabilities so do not do this, even if you have written it on other documents.
- if anybody is the settlor, it is likely the children themselves (or potentially the grandparents if they transferred the money straight into the bare trust or paid it over knowing it would go into the trust). So long as it is not you or your husband, it doesn't really matter.
- as the bare trust is transparent for tax purposes, there is no need to file a trust tax return.
- the children won't have to file a return or pay tax unless the income, together with their other income, exceeds their personal allowance/savings allowances.

If you have already registered the trusts, you may want to amend the settlor. If you have already registered them as taxable, you will want to call HMRC to get it changed to non-taxable ( i don't think you can do it online, but could be wrong). If registered as taxable, HMRC will issue you with notice to complete a tax return, which you will be obliged to complete (on a nil basis - but it's still a pain).

You are very unlikely to receive a penalty for late registration of a non-taxable trust. There are probably hundreds of thousands of bare trusts that have not yet been registered so HMRC have held back. I haven't heard of any being issued.

[AGoodman]

You have a few misunderstandings here.

- as a bare trust, the income/gains belong to the children. It is not a "settlement" (a term used in the tax legislation) but closer to a nominee arrangement where the trustee is nominee for the children. So far as tax is concerned, the trust/trustees are ignored and transparent.
- accordingly, there was no need for your husband to retire as trustee, the income/gains do not accrue to the trustees for tax purposes.
- the trust is registrable as "non-taxable" as the trustees of a bare trust are not taxed on its income/gains.
- your husband is NOT the settlor as the money did not derive from him. Stating that he is the settlor for TRS purposes might trigger HMRC to think he has tax liabilities so do not do this, even if you have written it on other documents.
- if anybody is the settlor, it is likely the children themselves (or potentially the grandparents if they transferred the money straight into the bare trust or paid it over knowing it would go into the trust). So long as it is not you or your husband, it doesn't really matter.
- as the bare trust is transparent for tax purposes, there is no need to file a trust tax return.
- the children won't have to file a return or pay tax unless the income, together with their other income, exceeds their personal allowance/savings allowances.

If you have already registered the trusts, you may want to amend the settlor. If you have already registered them as taxable, you will want to call HMRC to get it changed to non-taxable ( i don't think you can do it online, but could be wrong). If registered as taxable, HMRC will issue you with notice to complete a tax return, which you will be obliged to complete (on a nil basis - but it's still a pain).

You are very unlikely to receive a penalty for late registration of a non-taxable trust. There are probably hundreds of thousands of bare trusts that have not yet been registered so HMRC have held back. I haven't heard of any being issued.

[Larkspur]

AGoodman, Thank you for your detailed response to my query. I really appreciate your advice and suggestions - I will attempt to have the settlor amended presumably to the name of my child as the money wasn't invested in the bare trust before (or on) the death of the grandparent - it was probably 12-18 months later and was entirely my husband's choice of investment vehicle?
I'd already registered the bare trusts with no tax liability (correctly as it seems).

Thank you!