What is a Bare Trust?
A bare trust allows assets to be held by a trustee for a specified beneficiary e.g. a parent or grandparent holding trust property for a child. The named beneficiary has absolute entitlement to both the trust assets and the income received by the trust from those assets. This is why bare trusts are also known as ‘absolute trusts’.
Bare trusts are often used to transfer assets to minors e.g. they are particularly useful for someone wanting to buy shares for a minor where the investee has concerns around legal capacity for minors. The trustee of the bare trust is responsible for the investment decisions, although the trust deed often allows the beneficiary to direct decisions and votes.
The beneficiaries of the trust cannot be changed.
Bare Trusts and Income Tax
For tax purposes the beneficiary is treated as holding the trust property in their own name and the beneficiary is liable to tax on any income and gains arising.
The beneficiaries of a bare trust need to account for any Income Tax or Capital Gains Tax on their Self-Assessment tax return (as if it arose to them directly, not the SA107 Trusts supplementary pages).
Dividend income that is received is also deemed to belong to the beneficiary, unless the assets derive from the parent of the beneficiary. In those circumstances, the usual rules around where income arising is over £100, it is deemed to be income of the parent and potentially subject to tax on the parent applies. This does not apply to grandparents or other trustees, hence why this is a common option for grandparents to contribute to these type of trusts.
The beneficiary can make use of personal allowances.
Capital Gains Tax on a Bare Trust
Capital Gains Tax is charged on the beneficiary, as if the trust did not exist. The beneficiary must declare any chargeable gains on their personal Self-Assessment tax return.
Inheritance Tax on a Bare Trust
The disposition of assets into a bare trust are potentially exempt transfers for the purposes of inheritance tax and therefore the settlor (the person who gifted the assets or money to create the bare trust) must survive for 7 years following the gift of assets, for it to be wholly outside the settlor’s death estate,
Since the capital and income of a bare trust belong absolutely to the beneficiary, the beneficiary is responsible for any Inheritance Tax that may be due.
Any growth on the assets within the bare trust will be deemed to be outside the death estate of the settlor for inheritance tax.
ADVANTAGES OF A BARE TRUST
- Cheaper and easier to establish than other types of trust.
- As assets are registered in the names of trustees, these can often be used to protect the anonymity of the ultimate beneficiary.
- A bare trust can be used to hold assets for a minor who would be otherwise unable to benefit from owning securities.
- Withdrawals are permitted (unlike a JISA or SIPP), before the beneficiary reaches the age of 18 if they are for the benefit of the beneficiary where written instruction has been received from the trustee(s).
DISADVANTAGES OF A BARE TRUST
- The trustee has little discretion compared to other types of trust.
- Bare trusts are not particularly flexible vehicles when compared with other types of trust.
- The beneficiary can take control of the assets at age 18 which the settlor may not desire.
The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice. No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.