The trustees (minimum number of trustees is one, although two is preferable) of a bare trust (often referred to as a simple trust) simply hold the trust property on behalf of the beneficiary; the beneficial interest in the property belongs to the beneficiary and any income it generates also belongs to the beneficiary. In effect the trustees are transparent (this is very different to a discretionary trust, referred to as a substantive trust, for example).
Often a bare trust has only one beneficiary but there is no reason why the trust cannot have more than one; usually, each beneficiary would then have an equal share although this is not strictly necessary.
Grandparent Bare Trusts
Bare Trust: Lifetime
Bare trusts are often used by grandparents who wish to provide for a grandchild (or grandchildren) who is/are too young to accept and invest the gift.
Thus, for example, the grandparents may in their lifetime open an interest bearing bank account in the name of the grandchild and transfer cash into the account. The monies belong to the grandchild but the grandparents would retain signatory powers and if appropriate might withdraw funds to be applied for the benefit of the grandchild (eg a payment of school fees); any funds withdrawn must be for the benefit of the grandchild as they belong to him/her.
On attaining age 18 the beneficiary of the bare trust can demand that the trustees hand over the trust property and any income which has accrued; prior to age 18 the beneficiary is incapable of providing the trustees with a valid receipt for property and hence the need for the bare trust enabling the trustees to hold the gifted property on behalf of the beneficiary until he/she reaches age 18.
It is this aspect of a bare trust (ie the ability of the beneficiary to demand the trust property and income at age 18) that is often cited as a disadvantage if, for example, the monies involved are substantial as some regard age 18 as too young for a child to effectively inherit significant sums of money.
Bare Trust: Will
The bare trust might also be created by, for example, the will of a grandparent whereby shares in XYZ Ltd are to be held on bare trust for all the grandchildren in equal shares.
Non-Grandparent Bare Trusts
The provider of the property for the bare trust can be anyone including aunts, uncles and friends of the family.
Parent Bare Trust
Parents can also set up bare trusts for their children but this may have income tax disadvantages (see below).
Tax Treatment
For inheritance tax (IHT) and capital gains tax (CGT) the beneficiary (ie not the trustees) is treated as the beneficial owner of the property held in the bare trust.
The transfer of property into trust is a potentially exempt transfer (not a chargeable lifetime transfer) for IHT purposes. Thus no IHT arises if the donor (eg grandparent) survives seven years. A CGT liability may however arise on the transfer unless, say, cash is transferred.
Any capital gains arising within the trust are those of the beneficiary but (even though a minor) the beneficiary is entitled to the current annual exempt amount of £10,600. Should the minor die whilst a minor the trust property forms part of his/her estate for IHT but typically will fall within their nil rate band (currently £325,000) and thus no IHT will actually arise; the trust property will usually pass to his/her parents under the intestacy laws (a minor cannot execute a valid will).
For income tax purposes, the income is that of the minor (who can use his/her personal allowance) except where the transferor of the property is one of the parents and the income of the trust exceeds £100 per tax year (in this case the income is subject to income tax on the part of the parents; thus probably more highly taxed).
Other Uses
Bare trusts are also useful not just for minors. Where, for example, a transfer of property needs to be effected before the end of the tax year but there is insufficient time to transfer the legal title (eg where real estate is involved) the beneficial interest may be transferred immediately on bare trust (thus making the transaction effective for tax purposes) with legal title being transferred later (this may be a useful option, for example, where a buy to let is to be transferred from one spouse to the other spouse prior to sale before the end of the tax year).
Practical Tip :
If parents are to transfer property on bare trust for minor children it may be preferable to invest in non-income producing but capital growth assets.
Malcolm Finney
