Bare Trust - Information Sheet

Information April 2016
Bare Trusts
What is a Bare Trust?  If executors of an estate or trustees of a

discretionary trust wish to sell an asset,
A bare trust is, in a sense, a halfway house they might declare that they hold the
between a full trust and outright ownership. asset for beneficiaries prior to sale in
The legal control rests with the trustees and order to make use of the beneficiaries’
they have the usual trustee responsibilities annual exemptions and lower rates of
but ownership for tax and all other purposes tax for capital gains tax (CGT). They
belongs to the beneficiary. A bare trust can would then sell as bare trustees for the
arise in different ways: beneficiaries.
 It may come about informally where, say,

a parent simply holds an investment or Tax implications
an account with the designation
indicating ownership for someone else. Inheritance tax
 A formal bare trust involves a trust deed
conferring suitable investment and other For inheritance tax purposes the assets
powers on the trustees. The core of the belong to the beneficiary. Most significantly,
document would still be simple: "The this means that a gift to a bare trust will be a
potentially exempt transfer, and not
trustee holds the trust fund on trust for
immediately chargeable as would be the
the beneficiary absolutely." When the
case with a transfer into a full trust. On the
beneficiary is a minor, there is a trust
beneficiary’s death, the assets in the bare
because the beneficiary has no capacity trust will form part of his or her estate.
to call for the assets to be passed to him
or her.
Capital gains tax
 Where there is a bare trust in place,
once the beneficiary reaches the age of The trust has the benefit of the beneficiary's
18 he or she can demand the transfer of full personal annual exemption for capital
the assets. If that does not happen for gains tax (currently £11,100 – and not the
any reason, the bare trust will carry on. reduced exemption that applies to other
At that point, the trust would continue as trusts). Capital gains above that are taxed at
a simple nominee arrangement. The the beneficiary's rate, which, in the case of
Head Office most minors, will almost certainly be 10%
trustees would still have the
3 Lonsdale Gardens
Tunbridge Wells management powers conferred on them (18% if residential property is held as an
Kent TN1 1NX by the trust deed and the general law. investment), rather than the trust rate of
T 01892 510000 20% (28% on residential investment
F 01892 540170  In a similar way, a bare trust can come property).
into effect as a result of changing
Thames Gateway
Corinthian House circumstances. Take a trust which Income tax
Galleon Boulevard provides for a life interest to an individual
Crossways Business Park beneficiary, with the remainder to other
Dartford The income is the beneficiary’s, whose
Kent DA2 6QE
beneficiaries, such as children. If the life individual personal allowance, savings
T 01322 623700 tenant dies, at that point the trustees will allowances and, lower personal rates of tax
F 01322 623701 automatically be holding on bare trusts can be used. This compares very favourably
for those children. to the 45% rate applying to full trusts. It
www.ts-p.co.uk 1
April 2016
Bare Trusts
Continued
should be noted, however, that the income duties and responsibilities. Among many,
tax treatment is different if the funds have they must:
originated from a parent of a minor child,
where the income will be taxed on the  Act prudently, and in the best interests of
parent until the beneficiary reaches the age the beneficiary
of 18.
 Exercise what is referred to as the duty
Common uses of care
 Have regard to what are referred to as
One of the most common uses for bare standard investment criteria when
trusts is where grandparents want to set exercising their powers of investment
aside funds for their grandchildren's
 Protect and appropriately manage trust
education. If the funds are given early on
and if the grandparents survive for seven assets.
years, the gift will be outside the inheritance
tax charge on their deaths.
Disclaimer
Because of the tax treatment referred to
above, the monies in most bare trusts for This information sheet is written as a
minors will effectively be free of income tax general guide. As any course of action
and CGT. The trustees have the power to must depend on your individual
apply capital for the children's benefit which circumstances, you are strongly
they can do by paying school fees on their recommended to obtain specific
behalf. professional advice before you proceed.
We do not accept any responsibility for
If the funds are intended only for school action which may be taken as a result of
costs, then if the calculation of fees, having read this information sheet.
investment returns and inflation has been
accurate, the monies will be exhausted NOTE: The law is stated as at 6 April 2016.
ideally when the final term's fees are being
paid. Should that not be the case, then If you require further information, please
when the child reaches 18, as indicated contact Jeremy Passmore or Nicola Plant
before, the funds would normally be on 01892 510000 or by email at:
transferred to them, although the trustees
may be able to retain the bare trust [email protected]
structure or otherwise exert influence to [email protected] or
ensure the monies are sensibly used; for
example, for university expenses. © Thomson Snell & Passmore LLP All Rights Reserved
Trustee duties
While the beneficial interests in bare trusts

are less complicated than fully drafted
trusts, the trustees have most of the usual
www.ts-p.co.uk 2

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Information April 2016

What is a Bare Trust?  If executors of an estate or trustees of a

 It may come about informally where, say,

While the beneficial interests in bare trusts

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