What is a Bare Trust?

A bare trust is one of the simplest forms of trust in UK law. It’s a legal arrangement where assets are held by a trustee for the benefit of a beneficiary. Although the trustee is responsible for managing the assets, the beneficiary has an immediate and absolute right to them.

This means that once the beneficiary reaches the age of 18 (16 in Scotland), they can demand the transfer of the assets into their own name.

In this blog, we’ll explore how bare trusts work, why they are used, and the benefits they can offer in estate planning.

How Does a Bare Trust Work?

In a bare trust, there are three key parties:

• The Settlor: The person who creates the trust and transfers assets into it.
• The Trustee: The person or entity (such as a solicitor or bank) responsible for managing the trust’s assets on behalf of the beneficiary.
• The Beneficiary: The person who ultimately benefits from the trust.

The trustee holds the legal title to the assets but must manage them according to the terms of the trust. However, unlike more complex types of trusts, the trustee in a bare trust has no discretion over how or when to distribute the assets.

The assets must be managed and passed on to the beneficiary as soon as they reach the appropriate age.

The assets in a bare trust can include:

• Cash
• Property
• Shares or investments
• Other personal assets

Why Are Bare Trusts Used?

Bare trusts are commonly used in situations where someone wants to give a gift to a child or young person but still maintain some control over the assets until they reach adulthood. This is particularly useful for parents or grandparents who wish to pass on savings or investments.

Some common reasons for setting up a bare trust include:

• Gifts to Minors: Bare trusts are often used to hold assets for children until they are old enough to manage them independently. This can be especially helpful for large gifts or inheritances, ensuring the funds are protected until the child reaches a responsible age.

• Tax Planning: A bare trust can be a useful tool for inheritance tax (IHT) planning. Once the assets are placed in the trust, they are no longer considered part of the settlor’s estate, potentially reducing the IHT liability. However, this benefit only applies if the settlor survives for seven years after making the gift.

• Gifts for Family Members: You may also use a bare trust to make gifts to family members or friends, allowing you to control when they receive the assets.

Related: Our Estate Planning Services

Tax Implications of a Bare Trust

One of the key benefits of a bare trust is that it offers certain tax advantages. The tax treatment of a bare trust is relatively straightforward compared to other trust structures.

• Income Tax: Any income generated by the assets in the bare trust is taxed as the beneficiary's income. If the beneficiary is a child, they may not pay income tax if their total income is below the personal allowance. However, if a parent is the settlor, and the income exceeds £100 per year, the income will be taxed as the parent’s income to avoid tax avoidance schemes.

• Capital Gains Tax (CGT): Any gains made from assets in the bare trust are taxed as the beneficiary’s capital gains. Beneficiaries, particularly children, can benefit from the capital gains tax allowance, which may reduce or eliminate any CGT liability.

• Inheritance Tax (IHT): Once the assets are placed in a bare trust, they are no longer considered part of the settlor’s estate, which can help reduce the inheritance tax burden. However, to take full advantage of this benefit, the settlor must survive for seven years after making the transfer. If the settlor dies within seven years, the assets may be included in their estate for IHT purposes.

Advantages of a Bare Trust

There are several advantages to setting up a bare trust:

• Simplicity: Bare trusts are relatively straightforward compared to other types of trusts, making them easier and cheaper to set up and manage.

• Control: The settlor can maintain control over when the beneficiary receives the assets, while the trustee ensures that the assets are managed properly until the beneficiary is of age.

• Tax Efficiency: Bare trusts offer potential tax advantages, especially when gifting to children. The trust structure can help reduce inheritance tax liabilities and allow the beneficiary to make use of personal allowances for income tax and capital gains tax.

Disadvantages of a Bare Trust

While bare trusts have their benefits, they also come with certain limitations:

• Limited Flexibility: Once the assets are placed in the trust, they belong to the beneficiary. The trustee cannot change the terms of the trust, and the beneficiary has the right to claim the assets as soon as they reach the age of 18 (16 in Scotland), regardless of whether the settlor or trustee believes they are ready.

• Loss of Control: Unlike more flexible trusts, the settlor loses control over the assets once they are placed in the trust. This can be a disadvantage if the settlor has concerns about how the beneficiary will use the assets once they gain control.

• Tax Implications for Parents: If a parent creates a bare trust for a child and the income from the trust exceeds £100 per year, that income is taxed as the parent’s, which can reduce the tax efficiency.

Is a Bare Trust Right for You?

A bare trust can be an effective and tax-efficient way to gift assets to children or young adults. However, its simplicity also means that it may not offer the level of flexibility or control that some people need.

If you’re considering setting up a bare trust, it’s important to speak with a solicitor or financial adviser to understand whether this type of trust is the best option for your circumstances.

Conclusion

A bare trust is a straightforward and useful tool for gifting assets to children or other beneficiaries, while still maintaining some control until they reach adulthood. With tax benefits and a simple structure, it’s often the first choice for parents or grandparents looking to pass on savings or investments.

However, because the trust automatically passes control of the assets to the beneficiary at age 18, it’s important to carefully consider whether this structure suits your needs.

If you’re interested in setting up a bare trust or want more information about how it could benefit your estate planning, get in touch with our expert solicitors today.