What is a Bare Trust?

There are a number of different types of trust, and this variety can be overwhelming. Many people have been told that the establishment of a trust is the best option for them; however, deciding on the correct type to use in certain circumstances can be difficult. A bare trust, also known as a simple trust, is one of the most basic and easy to understand forms of trust.

Under a bare trust arrangement, as with any trust, assets are transferred into trust by the settlor. At this point the settlor gives up the legal title to the assets; they cease to be their property, and instead become the property of the trust.

Trustees then take on the responsibility for the management of these assets, which must be dealt with in such a way as to produce the maximum benefit for the intended beneficiaries. The terms of the trust will determine how much discretion is given to the trustees.

Trustee Rights

Bare trusts leave no room for trustee discretion. When assets are transferred into these trusts, the trustees have no practical control over them; their control is in title only. Furthermore, the trustees have no discretionary power over the proceeds of the trust – they may not withhold income or capital generated by or contained within the trust.

Bare trusts are particularly useful for parents or grandparents who wish to pass on assets to their children or grandchildren. The named beneficiary has what is known as ‘absolute entitlement’ to the assets that are placed in trust, but they will be held in the name of the trustee until the child reaches the age of 18. At this point the beneficiary will be immediately able to call on the assets; the trustees will have no discretion over whether or not they should receive them.

Tax Treatment

An attractive aspect of bare trusts is their tax treatment. As the beneficiary has absolute entitlement to the assets in trust, and the legal title was given up by the settlor when they transferred the assets, there is no tax implication for the settlor. For tax purposes, the assets are treated as the property of the beneficiary. If they are a child they are unlikely to be earning and will therefore not be using up their annual tax exemptions. As such, a bare trust offers a highly tax-efficient method of ring-fencing assets for future generations.

There are, however, potential inheritance tax (IHT) implications. Assets placed in trust are treated as potentially exempt transfers, meaning that they are likely to be subject to IHT if the settlor should die within seven years of the transfer. This is only the case, however, if the total transfers made by that individual within that year total more than £3,000; gifts made below this annual limit are exempt.

Many solicitors will insist that professional help is required to establish a bare trust. In reality, however, many building societies and other savings organisations will be able to provide the forms that you need. These should be filled out and forwarded to your local Tax Office for stamping.