With bare trusts the beneficiary (the person who benefits from the trust) has an immediate and absolute right to both the capital and income in the trust. Beneficiaries will have to pay Income Tax on income that the trust receives. They might also have to pay Capital Gains Tax and Inheritance Tax.
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A bare trust is one where the beneficiary has an immediate and absolute right to both the capital and income held in the trust. Bare trusts are sometimes known as 'simple trusts.'
Someone who sets up a bare trust can be certain that the assets (such as money, land or buildings) they set aside will go directly to the beneficiaries they intend. These assets are known as 'trust property'. Once the trust has been set up, the beneficiaries can’t be changed.
The assets are held in the name of a trustee - the person managing and making decisions about the trust. However, 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.
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).
Trustees may receive income from investments such as bank interest, dividend income from stocks and shares or rental income from land or buildings. The beneficiary is liable for Income Tax on income received by the trust.
If you're the beneficiary and you're entitled to any income from a bare trust, you should tell your tax office. If you don’t already do so, you'll need to fill in form SA100 Self Assessment Tax Return. The beneficiary is responsible for this tax, but it may be paid for you by the trustee.
Get help completing your Self Assessment tax return in our guide below.
Capital Gains Tax is a tax on the gain in the value of assets such as shares, land or buildings. A trust may have to pay Capital Gains Tax if assets are sold, given away or exchanged (disposed of) and they’ve gone up in value since being put into trust. The trust will only have to pay the tax if the assets have increased in value above a certain allowance. This allowance is known as the 'annual exempt amount'. The assets of a bare trust are treated for tax purposes as if the beneficiary holds the trust assets in their own name. In a bare trust the beneficiary pays the tax as if they owned the assets directly.
If you're the beneficiary you must declare any chargeable gains on your personal Self Assessment tax return.
Inheritance Tax is sometimes payable if the person who put an asset into the bare trust dies within seven years of doing so. This is known as a 'potentially exempt transfer'.
The beneficiary is responsible for this tax. You can find out more about Trusts and Inheritance Tax in the link below.