Bare Trusts

An independent review by our team of experts

Key features of bare trusts:

A bare trust is also referred to as a simple trust.
The income that is generated from trust assets, these can be in the form of interest, dividends or rent, is taxed in the hands of the beneficiary, making it a tax-efficient way of transferring assets to your descendants.
There are no tax implication for the settlor who sets up a bare trust. This is because he is giving up legal title to the assets when they are transferred to the trust.
Assets in a bare trust are held in the name of a trustee. However, the beneficiary has the right to all of the capital and income of the trust at any time if they’re 18 or over (in England and Wales), or 16 or over (in Scotland).
This means the assets set aside by the settlor will always go directly to the intended beneficiary.

Example:

You leave your sister some money in your will. The money is held in trust.

Your sister is entitled to the money and any income (for example interest) it earns. She can also take possession of any of the money at any time.

Disadvantages of Bare Trusts:

A major disadvantage with a bare trust is that the beneficiaries cannot be altered once the trust has been set up.
Another negative aspect is that there may be potential capital gains tax and IHT implications in some jurisdictions.

NOTE:

Beneficiaries may also be responsible for paying inheritance tax if the trust settlor dies within 7 years of establishing the trust because bare trusts are treated by tax authorities as potentially exempt transfers.
No inheritance tax will be owed, however, if the settlor outlives those 7 years. There is no tax implication for the individual who sets up a bare trust because he/she gives up legal title to the assets when they are transferred to the trust.
We would highly recommend reading the 'expert verdict' section of this review to make an informed decision.

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The Pros

> Capital and income held by trustee for the absolute benefit of the beneficiary or beneficiaries, normally a child or children

> Potential income tax and capital gains tax benefits (and IHT benefits after 7 years)

> Simple form of trust easy to understand and establish/monitor

The Cons

> Total inflexibility

> Capital gains tax (CGT): If you transfer assets during your lifetime to a bare trust whose market value exceeds the acquisition cost, CGT is charged on the notional gain. Gains realised by the trustees are treated as realised by the beneficiary and their annual exempt amount is available to offset the gains

> Inheritance tax (IHT): The assets are in the beneficiary’s estate and will be subject to IHT on their death. If you make a gift to a bare trust, you need to survive for seven years for the value of the gift to fall outside your estate for IHT purposes

Who can benefit from this form of trust?

The beneficiary has the right to all of the capital and income of the trust at any time if:

they’re 18 or over (in England and Wales),
or 16 or over (in Scotland).

What are trusts for?

Trusts are set up for a number of reasons, including:

To control and protect family assets.
When someone’s too young to handle their affairs.
When someone cannot handle their affairs because they’re incapacitated.
To pass on assets while you’re still alive.
To pass on assets when you die (a ‘will trust’).
Under the rules of inheritance if someone dies without a will (in England and Wales).

As a beneficiary of a bare trust, am I responsible for paying income tax on it?

If you’re the beneficiary of a bare trust you’re responsible for paying tax on income from it.

You need to tell HMRC about the income on a Self Assessment tax return.

If you do not usually send a tax return, you need to register for self-assessment by 5th October following the tax year you had the income.

Expert assessment of a bare trust

A bare trust can be a useful solution, but whether it is applicable has to be determined on a case-by-case basis, as does the case for using trusts in general.

If you already have a trust structure in place and would like a Second Opinion - or, if you are wondering whether the utilisation of a trust could be of benefit to you, contact us.

NOTE: Because trusts are so unique to each individual, it’s impossible to give them a rating for their overall performance and suitability. Therefore these reviews do not come with a star rating.

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RISKS

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A bare trust is so called because it is a very basic form of trust.

In a bare trust, beneficiaries have the absolute right to the capital and assets within the trust, as well as the income generated from these assets.

Bare trusts are widely used by parents and grandparents to transfer assets to their children or grandchildren (the trustees look after them until the beneficiary is old enough).

The trustee has no discretion in directing the trust's income or capital.

Bare Trusts

An independent review by our team of experts

REVIEW SUMMARY