HM Revenue and Customs has issued a warning for grandparents who have set up trusts for their grandchildren, after a taxpayer reported that their trust tax returns were being rejected. The taxpayer, who wrote to the Telegraph seeking advice from tax expert Mike Warburton, described setting up a bare trust in 2025 for two grandsons aged 11 and nine, intending to build nest eggs for future house deposits.
Details of the Trust and Tax Filing Issue
The taxpayer registered an account in each grandson's name and invested as the lead trustee. By the end of the 2025-26 tax year, the investments earned approximately 1.5% dividends and 20% capital gains. The taxpayer realized enough investments to use each grandson's £3,000 capital gains tax allowance and reinvested the proceeds within the account.
The taxpayer submitted self-assessment returns (SA900) for each grandson to HMRC, but the submissions were returned with a message stating: "You cannot complete a trust tax return if your trust record has not been set up as a taxable trust. If you want to send in a trust tax return, please convert your non-taxable trust record into a taxable trust record."
Taxpayer's Confusion and Request for Guidance
The taxpayer admitted misunderstanding the tax status of the trust when setting it up. They asked: "Before executing the conversion to a taxable trust record, perhaps you could provide some guidance on whether there are any advantages to leaving the trusts unchanged or would I be creating a longer-term problem for my grandsons when control of the trusts reverts to them in the future?"
Types of Trusts and Bare Trust Characteristics
The main types of trusts include bare trusts, interest in possession trusts, discretionary trusts, accumulation trusts, and mixed trusts. Settlor-interested trusts and non-resident trusts are also listed. Assets in a bare trust are held in the name of a trustee, but the beneficiary has the right to all capital and income at any time if they are 18 or over in England and Wales, or 16 or over in Scotland. This ensures assets set aside by the settlor go directly to the intended beneficiary. Bare trusts are often used to pass assets to young people, with trustees managing them until the beneficiary reaches the required age.
Implications for Grandparents and Beneficiaries
The HMRC rejection highlights the importance of correctly classifying trust records. Converting to a taxable trust record may have implications for tax liabilities and future control. According to tax experts, grandparents should seek professional advice to avoid long-term problems for beneficiaries. The taxpayer's situation underscores the complexity of trust tax rules and the need for clear guidance from HMRC.
