Trusts can seem complicated, but a bare trust is one of the most straightforward legal arrangements available in the UK. Whether you’re planning for a child’s future, managing an inheritance, or holding assets on behalf of someone else, a bare trust could be exactly what you need.
What Is a Bare Trust?
A bare trust (also called a simple trust or absolute trust) is an arrangement where one person (the trustee) holds assets on behalf of another person (the beneficiary) with no conditions or discretion attached.
The beneficiary has an absolute and immediate right to the assets and any income they produce. The trustee holds legal title to the asset, but the beneficiary owns it in every meaningful sense.
Common Examples
- Parents or grandparents holding investments or savings for a child until they turn 18
- An adult holding shares in a company on behalf of the true owner
- A solicitor holding client funds in their client account
- Junior ISAs and Child Trust Funds, which operate on bare trust principles
Who Are the Parties?
A bare trust involves three roles: the settlor (who places assets into the trust), the trustee (the legal owner who holds and manages the assets), and the beneficiary (who is entitled to the assets and the income).
In a bare trust, the settlor and trustee are often the same person, particularly when a parent holds assets for a child.
Tax Treatment
The tax treatment of a bare trust is relatively simple, which is part of its appeal:
- Income Tax: The beneficiary is treated as receiving the income and taxed accordingly. For minor children, if the settlor is a parent, income above £100 per year may be taxed as the parent’s income under the parental settlement rules.
- Capital Gains Tax: Any gains are treated as the beneficiary’s gains and assessed against their annual CGT allowance.
- Inheritance Tax: Assets in a bare trust are generally treated as part of the beneficiary’s estate for IHT purposes — which can make them useful for estate planning.
Important: Tax law is complex and individual circumstances vary. Always seek professional advice before creating a trust for tax planning purposes.
How Is a Bare Trust Created?
A bare trust does not always require a formal deed, but it is strongly advisable to record the arrangement in writing. A declaration of trust or trust deed sets out who the trustee and beneficiary are, what assets are held, and on what terms.
For property, the Land Registry will show the trustee as the legal owner, but a trust deed or restriction on the title will reflect the beneficial ownership.
How Does a Bare Trust End?
A bare trust ends when the beneficiary requests the assets, when the assets are transferred (for example, when a child turns 18), or when the assets cease to exist.
Is a Bare Trust Right for You?
A bare trust is ideal where you want a simple, transparent, and tax-efficient way to hold assets for a clearly identified beneficiary.
However, it offers no flexibility. Once established, the beneficiary cannot be changed and the trustee has no discretion. If flexibility is important, a discretionary trust may be more appropriate.
Our trust and estate planning team can advise you on the right structure for your circumstances. Contact us to arrange a consultation.