Bare trusts: at a glance
- What do I need to know? Bare trusts allow you to transfer ownership of assets to beneficiaries you specify. They're one of the simplest types of trust. Once you place assets in a bare trust, the beneficiaries legally own them.
- What does it mean for me? You can sometimes use bare trusts as a tax-efficient way to gift money and protect your wealth. But transfers are permanent, meaning you lose of control over your assets.
- Why does it matter? Beneficiaries are the legal owners of bare trusts, so they’re responsible for paying Income Tax and Capital Gains Tax on the assets. This can sometimes make bare trusts tax-efficient, depending on the circumstances.
Bare trusts allow you to pass on money and assets while potentially reducing the amount of tax your beneficiaries pay. But you give up control over your wealth once you put it in a bare trust, as ownership moves over to the beneficiaries immediately.
In this guide, you’ll learn the key features of bare trusts and how using them to structure your gifting can form part of your wider wealth strategy to reduce unnecessary tax bills.
What is a bare trust?
A bare trust - sometimes referred to as a simple trust - is one of the most common types of trust fund. In general, there are three main roles assigned to people when you set up a trust:
- Settlor: the payee of the trust
- Trustee: the manager of the trust
- Beneficiary: the recipient(s) of money and assets The beneficiary receives the immediate and absolute right to the funds within, and income generated by, the trust.
This means in a bare trust, the trustees have no legal control over the assets. But in some circumstances, such as when the beneficiary is a child, a trustee will be responsible for managing the trust on behalf of the child until they become an adult.
Bare trusts have relatively straightforward tax rules, as the beneficiary is treated as the legal owner for tax purposes. But this also means you get the least amount of control compared to other trusts.
There’s no limit to how much you can pay into a bare trust. This is unlike other methods of saving money for children, such as Junior Individual Savings Accounts (JISAs) or Junior Self-invested personal pensions (SIPPs), which have contribution limits.
How do bare trusts work?
Once you transfer assets into a bare trust, the beneficiary becomes legally entitled to them.
Bare trusts are generally irrevocable, meaning you can’t reclaim the assets in the trust or change the beneficiary once you’ve deposited funds into the trust.
How do bare trusts work for children?
If the beneficiary is under 18 (or 16 in Scotland), access is deferred until they reach this age, though they still legally own the assets before this.
Unlike other types of trusts, trustees have no discretion or control over how or when beneficiaries access the assets. The beneficiary can demand them in full once they become an adult.
How do I set up a bare trust?
As the settlor, you’ll need to take the following steps to set up a bare trust:
- Find a qualified financial adviser.
- Name your beneficiaries and appoint trustees.
- Create and sign a trust deed outlining the terms.
- Transfer your chosen assets into the trust.
- Register with the HMRC’s Trust Registration Service within 90 days.
Setting up a trust is a complicated process. Working with a qualified financial adviser and a solicitor is essential to ensure everything is set up correctly and you understand the rules.
Bare trust tax implications
Trusts often involve complex tax rules. But the straightforward structure of bare trusts means their tax implications are comparatively less complicated.
Bare trusts and Inheritance Tax
For Inheritance Tax (IHT) purposes, transfers into a bare trust are generally treated as Potentially Exempt Transfers (PETs). If you live for seven years after transferring money and assets into a bare trust, HMRC won’t charge IHT, provided you don’t continue to benefit from the assets.
As the trust’s assets legally belong to the beneficiary, they are considered part of their estate for IHT, not yours.
Bare trusts and Capital Gains Tax
Trustees aren’t responsible for paying Capital Gains Tax (CGT) in a bare trust. This is because the assets legally belong to the beneficiaries.
Beneficiaries are responsible for paying CGT if the assets in the trust are sold for a profit.
Bare trusts and Income Tax
Beneficiaries pay Income Tax on the earnings made through a bare trust. HMRC charges Income Tax depending on the beneficiaries’ tax band.
If you hold a bare trust for your child under 18 (or 16 in Scotland) and the trust’s income exceeds £100 per tax year, the parental settlement rule applies. This means that you, as the parent, may need to pay tax on the income the trust generates. This can change your tax code.
Who uses bare trusts?
Most people can set up a bare trust, provided you work with a financial adviser to ensure the trust is set up correctly. Parents and grandparents often use bare trusts to pass their wealth on directly to younger generations, making them a useful tool for estate planning, retirement planning, or lifetime gifting.
Bare trusts are especially valuable for grandparents. This is because only parents or legal guardians can open Junior ISA accounts, even if anyone can fund them up to the annual limit.
You can also use bare trusts to take advantage of a beneficiary’s lower tax rate and allowances, so your loved ones keep more of what you gift them.
Advantages and disadvantages of bare trusts
It’s important to weigh the benefits and drawbacks of bare trusts to determine whether it’s the best trust type for you and your family.
| Advantages | Disadvantages |
|
|
Trustees have no control over assets |
| Supports estate planning and lifetime gifting | Seven-year rule applies for tax purposes |
| Can reduce tax payments through the beneficiary’s lower tax rates | Beneficiary can’t be changed once the trust is set up |
| Allows gifting for children, grandchildren, or other beneficiaries | Parents could pay Income Tax on the trust due to parental settlement rules |
| Children only gain access when they reach legal age | Beneficiaries gain full access to all assets when they reach legal age |
| Management fees are often lower and less complex than other trust types | Generally irrevocable, so assets can’t be withdrawn by the settlor or trustees |
What assets can be put in a bare trust?
You can hold a wide range of assets in a bare trust, including:
- cash
- stocks and shares
- investment portfolios
- property and land
Once you place assets into a bare trust, they legally belong to the beneficiary. This means you no longer own or control them, even if you’re acting as a trustee.
But the rules become more complicated if you continue to benefit from the asset you gift, such as continuing to live in a property you’ve placed into a bare trust.
In this case, while you would no longer be the legal owner, continuing to live in the property changes the status of the gift. It no longer counts as a PET, because HMRC will treat it as a gift with reservation instead.
This means the property remains part of your taxable estate for IHT purposes.
When does a bare trust end and how is it ‘dissolved’?
A bare trust dissolves once the beneficiary takes full ownership of the assets. Bare trusts typically end when the beneficiary reaches legal age and can demand control of the assets.
In other cases, such as bare trusts set up between spouses for tax efficiency, the beneficiary might choose to leave assets with the trustee temporarily. Although, they reserve the right to demand full ownership at any time.
Bare trusts vs. discretionary trusts
Bare trusts and discretionary trusts are two of the most common trust funds, but they differ significantly in terms of control, access, and taxation.
Unlike bare trusts, discretionary trustees have full control over how and when they distribute assets. Beneficiaries have no automatic entitlement, and trustees can decide whether to distribute the income, funds, or both.
While both trust types are typically irrevocable, their tax rules differ considerably. Discretionary trusts have more complex tax considerations. In a bare trust, beneficiaries are responsible for Income Tax and Capital Gains Tax, whereas in a discretionary trust, trustees are generally responsible for paying tax.
Discretionary trusts might be better suited to longer-term estate planning and situations where control and flexibility are important to you.
Is a bare trust right for you?
Bare trusts can form a valuable addition to your estate planning, helping you pass on generational wealth while potentially reducing household tax bills.
But the tax advantages could be limited if you benefit from the trust’s assets or trigger the parental settlement rule, which could result in you paying Income Tax.
Bare trusts involve a loss of control over your wealth. Once you gift, the assets no longer belong to you. HMRC also charge the beneficiary Income Tax and Capital Gains Tax in most cases.
This means you should think carefully before establishing a bare trust, ensuring the beneficiary has the financial literacy to protect and grow what you gift them.
By taking these precautions, you can protect your assets with tax efficiency, gift more to loved ones, and help them retain long-term wealth.
Grow while you gift with Flagstone
Flagstone operates as a bare trust, acting as the trustee for your deposits into high-interest savings accounts, letting you decide which accounts you fund.
If you’ve opened a bare trust, you can also join Flagstone’s savings platform, provided you open an account with a minimum investment of £100,000.
