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    Succession planning for grandchildren

    As a grandparent there could be many reasons as to why you wish to provide directly for your grandchildren and the best way to do this would vary depending on your personal circumstances and what you are looking to achieve from your succession planning.

    One of the reasons grandparents may look to provide directly for their grandchildren as opposed to their children, is that they might have an inheritance tax liability in their own right. Skipping a generation can be a good way to transfer money down to your family without causing further tax issues.

    One of the ways often used by grandparents to build up a sum of money for their grandchildren is to set up trust for them, two of the more commonly used for this are discussed below.

    Bare trust

    With a bare trust (sometimes known as an absolute or fixed term trust), the assets are held in the name of a trustee (the grandparent) but are designated to the beneficiary (the grandchild) who will have access to the funds when they reach the age of 18. The beneficiary of a bare trust would have the absolute right to the capital and assets within the trust, as well as the income generated from these assets.

    Any gift made to set up a bare trust will be treated as a potential exempt transfer (PET) for inheritance tax purposes for the grandparent and not be considered as fully outside of their estate for 7 years after the gift is made.

    The biggest benefit in comparison to other types of trusts is that there is no limit as to the amount that can be added to the trust.

    The beneficiary of a bare trust would be entitled to the trust capital and any income generated from it, meaning any income of capital generated is assessed on them. Therefore, income and gains have the potential to be tax free if personal tax allowances aren’t exceeded.

    Although commonly used for making a gift to a child, anyone can be named as a beneficiary of a bare trust, but once they have been named, the beneficiary or beneficiaries are locked in and cannot be changed.

    It is also important to consider the length of time the money is likely to be held in the trust and that a sensible investment strategy is in place to support that, if it is likely to be a long investment timescale then there could be the potential to adopt greater investment risk, but this would require careful thought and expert advice.

    Discretionary trust

    Unlike a bare trust, a discretionary trust gives trustees the power to decide how much beneficiaries get from a trust and when they get it. All capital and income is distributed completely at their discretion.

    With a discretionary trust there is greater flexibility and assets can be protected if circumstances were to change for any reason. You are able to choose anyone to be a beneficiary, or even specify classes of beneficiaries, such as ‘grandchildren’. It’s even possible for people who haven’t yet been born to be beneficiaries to allow you to plan for future grandchildren and other descendants.

    Discretionary trusts can be useful in a number of different circumstances and can be a valuable way to protect assets for beneficiaries who don’t have the ability to manage their own funds, such as younger grandchildren. The greatest benefit of this type of trust is that the trustees are able to make changes to what the beneficiaries get from the trust, as and when it becomes appropriate, so it offers much more flexibility in comparison to a bare trust.

    However, Discretionary Trusts are more complex from a tax perspective. Lifetime gifts into discretionary trusts are called chargeable lifetime transfers (CLTs). Therefore, entry charges, 10-year charges and exit charges may apply. Also, the trustees may need to pay capital gains tax, dividend tax and income tax along the way. It is also important to carefully select the underlying investment type too, but more commonly investment bonds are used to wrap the investments and help out with the tax planning.


    Succession planning can be complicated because there are so many different factors to consider, plus the added pressure of how much you could potentially lose if you get it wrong. For this reason, it’s essential to seek professional advice as soon as possible. If done correctly, it can allow you to ensure all your loved ones are in a better position financially in the longer term and you are making the most of your hard-earned money.

    Get in touch

    For tailored advice to your individual family circumstances, please get in touch with a member of our financial planning team by emailing or calling 01254 679131.

    The value of investments can fall as well as rise. You may not get back what you invest.

    The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction.

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