BARE TRUST: How To Set It Up In The UK

Bare Trust

In our experience, the usage and selection of trusts can be intimidating. As a result, this article will look at what a bare Trust is and how this sort of trust can be used to pass on money to various individuals as well as minors. We’ll also take a look at the tax advantages and how to set up a bare trust in the UK.

What is a Bare Trust?

Trusts are legal arrangements in which a person (known as the trustee) holds money or assets for the benefit of another (the beneficiary). Money (or assets) are commonly transferred as a gift into the trust and stored or invested until the trustees release the money or assets to the beneficiaries. Trusts can provide you (or someone you designate) with authority over when and how money is disbursed.

Trusts are useful for saving for children because they allow you to give money to them before they are old enough to receive it directly. They are particularly important for inheritance tax (IHT) planning because gifts to trust may currently reduce the value of your estate and thus the amount of IHT paid upon death.

Bare trusts are the most basic sort of trust and are formed by making a donation into a designated investing account with the goal of establishing a trust. The child is the beneficiary, and two adults are usually appointed as trustees. When the child reaches the age of 18, he or she is automatically entitled to investments. However, as a trustee, you may be able to distribute funds early if necessary, such as to pay school fees.

What are the Trustees’ Responsibilities?

The trustees have no say in the matter. They have no actual control over the assets; they simply hold them in their name. So, they are not permitted to withhold capital or income and must pay either capital or income to the beneficiary upon request.

Why would you rely solely on a Bare Trust?

Such trusts are especially handy for grandparents who want to give their grandchildren gifts or for those who have received compensation for a personal injury. When a bare trust is set up for a young child, the gift is held in the trust until the child reaches the age of 18. At that point, the kid has the right to request that the trust fund be transferred to them. The trustees would have to comply with their request, as previously stated.

How Does a Bare Trust Work In The UK?

When you create a Bare Trust, you name a specific beneficiary or beneficiaries who subsequently have an absolute claim to both the trust’s income (typically interest) and capital. They are typically employed for minor children who lack the legal capacity to claim the legal title on their own.

In general, any child under the age of 18 (in England and Wales) or 16 (in Scotland) is considered a minor beneficiary. The trustees you have nominated are simply looking after the trust assets until your child reaches the age of majority.

Bare Trusts are most typically used to provide a gift to a child, however, anybody can be listed as a beneficiary of a Bare Trust in UK. However, once they are nominated, neither you nor your appointed trustees have the authority to change who is entitled to the assets.

Creating a Bare Trust in UK

Bare Trust is easier to set up than Discretionary Trusts. Nonetheless, it is strongly advised that you obtain professional guidance first, as the lack of flexibility of a Bare Trust implies that you must thoroughly understand the extra ramifications before proceeding (e.g. the obligations of the trustees when the beneficiary turns age 18).

We have a number of trustworthy legal contacts with whom we collaborate to ensure that any future planning is coordinated and completely reflects your objectives.

What are the Advantages of Establishing a Bare Trust?

Bare Trusts are frequently used by grandparents who want to start saving for their grandkids but do not want them to have access to the funds until they reach the age of majority. They are also beneficial in terms of taxation. Your first gift into a Bare Trust arrangement is a potentially exempt transfer (unless exempt), and if you survive seven years, there is no inheritance tax charge1.

If the beneficiary has no other taxable income, as is usually the case with a minor child, they will have their entire tax allowances available to offset any income or capital gains tax arising from trust assets. A Bare Trust has no continuing inheritance tax issues.

Please keep in mind that HMRC has parental settlement regulations, therefore if a parent establishes a trust for their minor unmarried child(ren), income tax will continue to be levied against the parent/s if the income exceeds £100 per year (£200 per year if a joint gift).

What are the Disadvantages of a Bare Trust?

While Bare Trust is a relatively simple type of trust, it does have some disadvantages. The biggest disadvantage is that they have a fixed structure, which means that once the trust is established, the stated beneficiaries cannot be changed. This could generate problems if any further children or grandchildren are born after the trust is established since they will be denied access to the trust assets.

Furthermore, at the age of 18, the trust beneficiaries have the right to take possession of the trust assets and deal with them as they see proper. Some parents/grandparents are concerned that the assets will be sold and the earnings would be squandered.

Furthermore, you can establish a Bare Trust without informing the beneficiaries, which, while initially advantageous, may present issues if any of the beneficiaries has a high income or capital gains tax burden. Nonetheless, the trustees must notify the beneficiaries of the trust’s existence when they reach the age of majority, which may leave the trust assets in the potentially dangerous hands of teenagers.

However, in most cases, the trust can be set up to finance education fees and paid straight from the bare trust. This allows us to calculate the amount required, for this reason, leaving a smaller, less troublesome sum of money for the beneficiaries to enjoy.

Is a Bare Trust the best option for me in UK?

If you wish to set up a trust for a specific person and are okay with them having full management of the assets once they reach adulthood, a Bare Trust can be a more tax-efficient choice than most other types of trust available in the UK.

There are different trust arrangements that provide the trustees more freedom or discretion over possible beneficiaries and give them more control over wealth distribution. These trusts, however, would be considered quite differently for tax purposes and would necessitate a considerably higher level of administration.

Bare Trust case study.

Peter, Iris, and Lily are Graham and Elizabeth’s three grandkids. Because the children are all under the age of seven, the grandparents want to ensure that they have money when they are older to aid with expenses such as university, first jobs, and travel. They put £2,500 into a bare trust savings scheme for each grandchild.

Any income or capital gains tax on the investment is the responsibility of the grandchild and is covered by their personal allowances; because the gift is potentially exempt, it will be outside Graham and Elizabeth’s estate if they live for another seven years.

The Tax Implications of Bare Trust

The Inheritance Tax

Beneficiaries may also be liable for inheritance tax if the trust settlor dies within seven years of creating the trust because bare trusts are viewed as potentially exempt transactions by tax authorities. If the settlor outlives those seven years, no inheritance tax is due. The individual who establishes a bare trust incurs no tax consequences because they relinquish legal title to the assets when they transfer them to the trust.

Taxation on earnings

As previously indicated, the assets of the bare trust are kept by the bare trustee on behalf of the beneficiary, who has absolute rights to the assets’ income and capital.

As a result, the beneficiary’s income and any capital gains are taxed immediately. They must report this revenue on their personal tax returns in accordance with the standard self-assessment guidelines. It is important to note that there is no need to complete the trust pages on the tax return.

A possible exception would be if the parents have transferred income-producing assets to a bare trust for minor children. Although trustees can pay income tax on behalf of a beneficiary, the beneficiary is still personally liable for the tax.

Capital Gains

Capital Gains Tax is levied on gains made on assets held in bare trust. Who is responsible for paying taxes? The analysis is the same as described above. The assets and gain belong to the beneficiary of the bare trust, and he or she will be taxed as a result.

He or she will benefit from the Annual Exemption as well as any other CGT relief that may be applicable. Any gains will be subject to CGT at the standard rate. Again, any chargeable gains must be declared on the beneficiary’s personal Self-Assessment tax return.

Does a child’s trust automatically expire when he or she reaches the age of majority?

Although a beneficiary of a Bare Trust obtains possession of the trust assets when they reach the age of 18 (16 in Scotland), the Bare Trust does not terminate automatically. When the beneficiary is an adult, the trustee acts more like a nominee and must follow the beneficiary’s instructions about the assets owned.

Common Blunders in a Bare Trust

  • Properties purchased with or on numerous titles may necessitate a separate bare trust for each property or title; for example, inner-city flats with a unit and a car park on different titles may necessitate a bare trust for each title if they can be sold separately.
  • Properties purchased with an LRBA cannot be considerably altered, such as through major renovations.
  • Borrowings cannot be used to refinance an existing super fund property or to improve or change an existing super fund property.
  • Trustees frequently fail to recognise that any loan must be used only to acquire a new asset.
  • mistakenly believe that super funds can borrow using the same procedures as individuals or family trust structures (e.g., using existing unencumbered properties as security).
  • Signing a purchase contract and then seeking counsel is common practise. Execute the deal under the incorrect name.
  • Because certain states do not allow ‘and/or nominee’ provisions, this could result in additional stamp duty.
  • Do not comprehend that the superfund must have funds on hand to pay its portion of the acquisition price, i.e. the deposit.
  • You want to borrow money with little or no money down.
  • Negative gearing does not function in a low-tax environment (such as superannuation).
  • Forget that your investments as trustees are for the benefit of the members (not for the convenience of their business).

Bare Trust FAQs

Does a bare trust need a corporate trustee?

Until the debt is repaid, the bare trust is just the registered holder of the property. The trustee of the SMSF cannot be the same as the trustee of the bare trust; this may necessitate the use of a corporate trustee for both entities in some cases, depending on the lender’s criteria.

How much does it cost to set up bare trust?

The Bare Trust structure can be made up of up to three different businesses, each of which costs $950 to set up. The potential cost is $2,850, which includes the following: $950 for Corporate Trustee. $950 for Custodian Trustee.

When should you set up a bare trust?

You can only establish a bare trust after you’ve identified a property for your SMSF. You must first furnish your accountant with all of the property’s legal facts. The purchase must pass the single purpose test and be consistent with the SMSF investment plan outlined in the trust deed.

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The Bare Trust structure can be made up of up to three different businesses, each of which costs $950 to set up. The potential cost is $2,850, which includes the following: $950 for Corporate Trustee. $950 for Custodian Trustee.

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You can only establish a bare trust after you've identified a property for your SMSF. You must first furnish your accountant with all of the property's legal facts. The purchase must pass the single purpose test and be consistent with the SMSF investment plan outlined in the trust deed.

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