When we think about building a bright future for our children or grandchildren, we often think about savings accounts, first cars, or university funds. But have you ever considered how Capital Gains Tax (CGT) plays a role in your family’s long-term wealth?
Many parents and grandparents are surprised to learn that minors have unique tax advantages. With a little bit of forward-planning, you can legally and ethically structure gifts to keep more money in the family loop and out of the taxman’s pocket.
Let’s dive into how intergenerational tax planning works and how you can make the system work beautifully for your family.
Do Children Get Their Own Tax-Free Allowances?
Yes, absolutely! Under UK tax law, children are entitled to their own Capital Gains Tax (CGT) annual exempt amount just like adults.
If you hold an asset in your own name and sell it, any profit above your personal allowance will trigger a tax bill. By utilizing a child’s allowance alongside your own, you can effectively maximize the amount of tax-free profit your family can unlock.
The Big Challenge: English Law and Minors
While the tax benefits are clear, there is a legal catch. Under English law, a child under the age of 18 cannot give a valid receipt for a significant asset or piece of property. This means you cannot simply hand over stocks, shares, or property directly to a minor.
To bridge this gap, parents and grandparents use simple, highly effective legal tools:
A Bare Trust (Absolute Trust):
A straightforward arrangement where assets are held by trustees purely for the absolute benefit of the child.
A Nomineeship:
A designated account setup where an adult manages the investments, but the underlying legal ownership belongs entirely to the child.
Once the asset is tucked safely inside a bare trust or nomineeship, HMRC treats any future investment growth as belonging to the child.
The Hidden Superpower: The CGT ‘Rate Benefit’
The real magic of using a bare trust comes down to the tax rates themselves. If an adult sells a chargeable investment, they face a capital gains tax rate of up to 24% if they are a higher-rate taxpayer.
However, because the gains in a bare trust are assessed against the child’s income bracket, those profits will usually fall well within the basic-rate threshold. This means any gains over their tax-free allowance are taxed at just 18%—representing a significant structural tax saving for your family.
Navigating the Income Tax Traps
While the rules for Capital Gains Tax are incredibly generous, HMRC is much stricter when it comes to Income Tax.
If a parent gifts an asset to a minor child and that asset generates more than £100 of gross income in a single tax year, HMRC will tax that entire income as if it still belonged to the parental settlor. This anti-avoidance rule is designed to stop parents from shifting their personal income tax bills onto their kids.
(Note: More favourable rules exist for historical trusts established prior to 9 March 1999, provided no subsequent funds have been added).
The Good News: There is no equivalent anti-avoidance rule for Capital Gains Tax. This makes bare trusts an absolute goldmine for growth-focused investments (like stocks, shares, or investment funds that focus on capital growth rather than paying out regular cash dividends).
Important Things to Remember Before You Start
The Initial Transfer:
When you move a personal asset into a bare trust for a child, HMRC views that transfer as a disposal at current market value. If that asset has already grown significantly, you might trigger a personal CGT bill on the transfer itself, though it may fall within your own annual exempt amount.
It Belongs to Them:
In a bare trust, the money legally belongs to the child. When they turn 18, they have the absolute right to take control of the funds and use them as they see fit.
Let’s Build Your Family’s Financial Future
Intergenerational wealth planning doesn’t have to be confusing. By setting up the right structures early on, you can watch your family’s nest egg grow securely and efficiently.
If you would like to explore how these options fit your family’s goals, let us know! We can help look at:
- The types of investments you’re considering gifting
- Whether parents or grandparents are making the gift
- How to balance these choices with your child’s future tax thresholds
Drop us a message or schedule a friendly chat with our team today to get started.
