Bare Trusts

What is a Bare Trust?

A bare trust is where the beneficiary has an absolute right to the assets in the trust and any income generated for it. The trustee has been legally nominated to hold the assets on behalf of the beneficiary to whom the assets are intended for.

Bare trusts are most frequently used to pass assets to young people, although this is not their sole purpose. For example, a bare trust may be set up by a parent or grandparent for a child to access when they are older. In this scenario, a parent could put money aside for their child, who would be the beneficiary. When setting up the trust, the parent would nominate trustees to manage the assets until the beneficiary was old enough (usually 18) to access them. A trustee could be a reliable family member, friend or accountant.

What are the benefits of Bare Trusts?

  • Bare trusts are the simplest type of trust.

  • They have low administrative expenses.

  • Bare trusts usually have the lowest overall tax charges in comparison to other trust types.

  • Bare trusts have a potential income tax, capital gains tax benefits, and inheritance tax benefits (after seven years)

  • Bare trusts are particularly beneficial for low-earning individuals. The beneficiary is liable for any tax on these assets but will only pay tax if their income is above £17,850 (£11,850 personal allowance, £1000 personal savings allowance, and £5000 starting rate for savings). So, if the beneficiary has a combined income less than £17,850 annually, they will not need to pay income tax on the assets in the trust.

  • They act as a source of income for the beneficiary.

Happy Family

What are the disadvantages

of Bare Trusts

  • Lack of control for the trustees

  • The beneficiary of the trust cannot be altered

  • Bare trusts are not as tax efficient as they used to be due to reform in trust rules

  • Beneficiaries are responsible for tax owed on assets in trust

  • Any payments made into the trust are potentially exempt transfers. This means they will only be exempt from inheritance tax if the person who gifted the money lives longer than seven years.

The £100 income tax rule

Tax implications associated with Bare Trusts

  • Income tax – The beneficiary is responsible for any tax on generated income from assets in the trust. Income generated on a trust must be included on the beneficiary’s personal tax return.

  • Capital Gains Tax – Capital gains are profits made on assets when they are sold. These profits are taxed if they exceed a person annual exempt amount in any one year. The beneficiary will have to declare any chargeable gains made on the sale of assets within the trust in their self-assessment tax return.

  • Inheritance Tax – Bare trusts can be liable to inheritance tax if the person who sets up the trust dies within seven years of the trust being set up, but only if the amount they transferred into the trust exceeds their ‘’nil rate band’’. In this situation, the beneficiary of the trust would be accountable for the inheritance tax due.

How More Group can help 

Parents can be liable to pay tax on money they give their children if it earns more than £100 (per parent) in a year (before tax in interest). In this situation, the parent will be liable to pay tax on all interest if it exceeds their personal savings allowance. This tax rule only applies to guardians, parents, and step-parents but does not include grandparents or other family members.

To alleviate this tax, you can consider putting your child’s savings in a tax-free investment, such as a Junior ISA. In the UK the annual limit on a Junior ISA is £4,260. We can help to set up the most beneficial bare trust to suit your personal needs. By enlisting the help of one of our professional accountants, we will find an account to maximise the wealth of your beneficiary. Selecting the correct account is especially valuable when setting up a bare trust as interest usually develops over an extended period. This means the initial investment of hiring an accountant is usually quickly compensated through tax mitigated and through competitive interest rates.

Finding a bare trust to give you the best return on your investment is a challenging but essential task. Our experts specialise in seeking out the best options the market has to offer. We can advise on how to use different trust structures to mitigate tax liability and maximise your beneficiary’s wealth. Contact More Group for more information and to book your free consultation.

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