In this section:
Bare trusts
With bare trusts the beneficiary has an immediate and absolute entitlement to both capital and income in the trust. Beneficiaries will have to pay Income Tax on income that the trust receives. They may also have to pay Capital Gains Tax and Inheritance Tax.
On this page:
- What is a bare trust?
- Bare trusts and Income Tax
- Capital Gains Tax on a bare trust
- Inheritance Tax on a bare trust
What is a bare trust?
A bare trust (sometimes known as a 'simple trust') is one where the beneficiary - the person who benefits from the trust - has an immediate and absolute right to both the trust capital and the income received by the trust from that capital.
Someone who sets up a bare trust can be certain that the assets they set aside will go directly to the beneficiaries they intend, because, once the trust has been set up, the beneficiaries cannot be changed.
The trust assets are held in the name of a trustee (the person administering the trust), but the trustee has no discretion over what income or capital to pass on to the beneficiary or beneficiaries.
Bare trusts are commonly used to transfer assets to minors. Trustees hold the assets on trust until the beneficiary is 18 in England and Wales, or 16 in Scotland. At this point, beneficiaries can demand that the trustees transfer the trust fund to them.
Example
Gary leaves his sister Juliet some money in his will. The money is to be held in trust. Juliet is the beneficiary and is entitled to the money and any income (such as interest) it earns. She also has a right to take possession of any of the money at any time.
This is a bare trust because Juliet is absolutely entitled to both the capital (the original money put into the trust) and the income (any interest earned).
Bare trusts and Income Tax
The assets of a bare trust are treated for tax purposes as if the beneficiary holds the trust property in their own name and the beneficiary is liable to Income Tax on income received.
The beneficiaries of a bare trust need to account for any Income Tax or Capital Gains Tax on their Self Assessment tax return. They do this on the sections of the form SA100 that deal with income, not the SA107 Trusts etc supplementary pages.
Although trustees can pay Income Tax on behalf of a beneficiary, it is still the beneficiary who is liable for the tax.
Get help completing your Self Assessment tax return in our guide below.
Capital Gains Tax on a bare trust
Capital Gains Tax is a tax payable on ‘gains’ (profits) above a certain level made from the sale of assets such as shares, property or possessions. It is charged on any gains greater than the ‘annual exempt amount’, which is set each year.
In 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.
Download guidance notes on completing form SA108 Capital gains summary (PDF 127K)
Inheritance Tax on a bare trust
For Inheritance Tax purposes, assets placed in a bare trust are treated as ‘potentially exempt transfers’. This means that they are usually only subject to Inheritance Tax if the settlor who put the assets into the trust dies within seven years of doing so. In this case, 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.
