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Setting Up Bare Trust

Setting Up Bare Trust

Bare Trusts are ideal for family gifts such as cash, shares, or property where the donor wants certainty that the asset will belong to the child or young person. Bare trusts are used to pass assets to young people as settled property, ensuring the benefit goes directly to the intended beneficiary. They are also used when leaving assets to a minor in a will (to avoid a probate delay) or when setting aside funds for a specific purpose, such as education costs, without creating complex discretionary arrangements.

Key Advantages of a Bare Trust

  • Simplicity & Low Cost : A Bare Trust is one of the most straightforward UK trust structures. The beneficiary’s entitlement is fixed, so the trustees simply hold and manage the assets until the child reaches adulthood. Bare trusts are used to pass assets to beneficiaries, ensuring that the benefit of both capital and income is received directly by the beneficiary. This keeps set-up costs, administration, and professional fees lower than more complex discretionary trusts.
  • Clear Tax Treatment : Income and gains are normally taxed directly on the beneficiary, often using their personal allowances and lower tax rates. For gifts from grandparents or non-parents, this can mean little or no tax liability while the assets grow.
  • No Ongoing IHT Charges : Because the beneficiary’s interest is absolute, there are no 10-year periodic or exit charges that apply to discretionary trusts. The initial gift is treated as a Potentially Exempt Transfer, falling out of the donor’s estate if they survive seven years.

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    • Flexibility in Asset Choice : Cash, shares, property shares, or investment portfolios can all be placed in a Bare Trust, allowing the settlor to choose assets suited to long-term growth.
    • Early Gifting With Control Until 18 : Parents or grandparents can use a bare trust to pass assets and wealth to the next generation while ensuring it is managed responsibly by trustees until the child is mature enough to take full control and benefit from the trust.
    Loan Trust

    How a Bare Trustee Works in a Bare Trust

    The settlor (the person creating the trust) transfers assets set aside for the beneficiary into the trust fund, which is managed as trust property by the trustee. It is recommended to have at least two trustees to ensure proper management and oversight of the trust funds.

    The trustee holds legal ownership of the assets held in the trust and is responsible for managing them according to the trust deed until the beneficiary is able to give a valid receipt upon reaching the age of entitlement. The trustees must act in the beneficiary’s best interests but cannot change who benefits or withhold the assets once the beneficiary reaches adulthood.

    A letter of wishes can guide investment strategy, but it cannot override the beneficiary’s legal entitlement. There are also other types of trusts, such as settlor interested trusts, which may involve other beneficiaries and have different tax treatment.

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    Charitable Trust

    Who Does a Bare Trust Suit?

    • Parents and Grandparents who want to gift money, shares, or property to children now but delay access until they reach age 18 (16 in Scotland). Bare trusts are commonly used to pass assets to young people, including a minor unmarried child, so that the benefit of direct ownership is provided once they reach the age of entitlement.
    • Families making lifetime gifts to use inheritance-tax exemptions or start the seven-year IHT clock while retaining a level of oversight. Bare trusts can help pass assets to young people, ensuring the benefit goes directly to the beneficiary when they come of age.
    • Grandparents funding education or future expenses where the tax rules favour gifting from non-parents.
    • Beneficiaries needing straightforward ownership for example, when leaving an inheritance to a minor in a will but avoiding probate delays.
    • Small or moderate gifts where simplicity is more important than complex tax planning or asset protection.
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    Setting Up a Bare Trust

    A Bare Trust sometimes called a “simple trust” or “absolute trust” is one of the most straightforward trust arrangements available under UK law. In a Bare Trust, the beneficiary has an immediate and absolute right to both the capital and any income within the trust. The trustees merely hold the assets and manage them until the beneficiary is ready to receive them, typically when they reach the age of 18 in England and Wales (16 in Scotland).

    The trustee is the legal owner and holds the legal title to the trust assets on behalf of the beneficiary, with the assets held in the name of the trustee until the beneficiary reaches the age of entitlement. The beneficiary is absolutely entitled to both the capital and income, and the beneficiary has the right to demand the transfer of trust assets once they reach adulthood.

    Because the beneficiary’s entitlement is fixed, a Bare Trust is often used when parents or grandparents want to pass assets to young people, including minor children and minor unmarried children, while keeping them safe and professionally managed until adulthood. The trust’s existence is recognized for tax and legal purposes.

    Once the child reaches the specified age, they become the absolute owner of the property held in trust, even if they choose to leave the trust in place for investment or management purposes. The process of setting up a bare trust involves transferring assets and investing them for the benefit of the beneficiary, with bare trustees managing the trust assets until the beneficiary is entitled to them.

    Who Might Need a Bare Trust

    Bare Trusts are ideal for family gifts such as cash, shares, or property where the donor wants certainty that the asset will belong to the child or young person. Bare trusts are used to pass assets to young people as settled property, ensuring the benefit goes directly to the intended beneficiary. They are also used when leaving assets to a minor in a will (to avoid a probate delay) or when setting aside funds for a specific purpose, such as education costs, without creating complex discretionary arrangements.

    Common Uses

    Typical assets placed in a Bare Trust include cash savings, investment accounts, premium bonds, and property shares. Parents often combine a Bare Trust with a Junior Investment Account or stocks and shares portfolio, allowing tax-efficient growth until the child is old enough to take control. Trustees can also invest trust assets in a range of trust funds to maximize growth for the beneficiary.

    Income Tax Considerations

    Although the child is usually taxed on trust income and gains, gifts from parents to minor children have a special rule: if income exceeds £100 per parent per year, it is taxed on the parent at their rate. This is due to the parental settlement rules, which mean that income above the threshold is assessed on the parent for tax purposes. Gifts from grandparents or other relatives are not caught by this rule, making Bare Trusts particularly popular for grandparent gifting strategies. Beneficiaries must pay any taxes due on income or gains received from the trust.

    Trustees may need to register the trust on the HMRC Trust Registration Service (TRS) if there are UK tax liabilities. Other types of HMRC trusts, such as non resident trusts and discretionary trusts, have different tax rules and may be subject to different tax liabilities. Additionally, possession trusts (interest in possession trusts) and accumulation trusts each have their own tax treatment under HMRC trusts regulations, so it is important to understand the specific type of trust and its associated taxes.

    Setting Up a Bare Trust Deed

    Establishing a Bare Trust is relatively quick. You’ll need a trust deed, details of the beneficiary, and appointed trustees usually family members or professionals. Once the trust is created, assets are transferred; when property is transferred into a bare trust, it may constitute a chargeable interest for Stamp Duty Land Tax purposes. Trustees must keep proper records, file any necessary tax returns, and manage the investments prudently until the beneficiary reaches the age of entitlement.

    Next Steps

    Whether you are gifting a lump sum, planning for a future inheritance, or looking to protect assets for a young family member, a Bare Trust offers simplicity, transparency, and tax efficiency. HeirPlan can guide you through drafting the deed, registering the trust with HMRC, and planning long-term investment and tax strategies to give your loved ones a head start.

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