What is a bare trust?

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A bare trust is considered one of the simplest types of trusts in the UK, giving the beneficiary full ownership of the assets once they reach adulthood. Many people have questions about how bare trusts work, including: “What is a bare trust used for?”, “How are bare trusts taxed?”, and “How can I set up a bare trust?” This page gives a brief definition of bare trusts and answers some of the most common questions about them.

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A bare trust can be defined as a legal arrangement set up by a settlor where a nominated trustee holds assets on behalf of a beneficiary, who has full rights to them. Assets could mean cash, stocks and shares, or even a house. If the beneficiary is under 18 (or 16 in Scotland), the trustee manages the assets until they reach adulthood (at which point they gain full access).

One of the most common ways bare trusts are used in the UK is to pass assets to children or grandchildren. Many people consider them a tax-efficient method of wealth transfer, because the assets legally belong to the beneficiary, meaning any tax is usually based on their tax status rather than the trustee’s. Hence, why they are also used in inheritance planning, since the assets legally belong to the beneficiary from the start.

The most common example of a bare trust is when a parent or grandparent (the settlor) wants to help out a child financially as they enter adult life. For example, they might place £10,000 in investments for their grandchild in that trust. Until the child becomes an adult, the trustee looks after the funds, but the money legally belongs to the child (including any interest or capital gains).

Alternatively, a settlor may want to use a bare trust to put funds aside for the benefit of another adult who is incapable of managing their own finances. In this bare trust example, the trustee is in charge of managing the assets, but the beneficiary has the right to demand the assets at any time. 

When someone purchases an asset but puts it in another person’s name, the law sometimes treats this arrangement as a bare trust. Although the asset is officially registered in someone else’s name, that person is merely holding it for the real owner, who may be unable to manage it themselves.

Bare trusts have one distinguishing feature that sets them apart from other types: the beneficiary has an absolute right to both the capital and any income from the trust without having to meet any conditions. Once they reach legal age, they can access everything in full.

Key features of a bare trust:

• The named beneficiary has what’s known as absolute entitlement to the property within the bare trust, meaning they have the full legal right to receive and control the assets within it.
• The settlor is the person who creates the bare trust and puts assets into it for the beneficiary.

• Because the assets belong to the beneficiary, any income and capital gains tax due depend on their tax position.

• Trustees manage the assets on behalf of the beneficiary.

The trustee of a bare trust has very few active responsibilities. Their main role is simply to follow the beneficiary’s instructions and manage the trust accordingly. Although the bare trustee’s name is associated with the trust, the beneficiary is ultimately the one who owns the capital and income generated from it. Essentially, bare trustees hold the property or investment assets within the trust.

When looking at a definition of a bare trust in the UK, it’s worth noting that the legal age varies in the UK: it’s 18 in England, Wales, and Northern Ireland, and 16 in Scotland. Once the beneficiary of a bare trust reaches this age (assuming they are mentally capable), they gain full control over the trust’s assets. Unlike other trusts, there are no additional conditions or restrictions once the beneficiary reaches legal age.

There are a few steps to take when setting up a bare trust:

1. Choose the assets – You can place several different assets in the trust, from cash and investments to property.
2. Name the beneficiary.
3. Draft a trust deed – This is a legal document that outlines the trust’s terms and confirms the trustee’s role. This isn’t always required, however, and the settlor may be able to draft a declaration of trust themselves.
4. Appoint a trustee to manage the trust and act in the beneficiary’s best interests.
5. Sign the trust deed – All relevant parties must sign the trust deed to make it official.
6. Transfer the assets into the trust.
7. Register the trust with HMRC – Trustees must register new trusts with HMRC within 90 days, even if no tax is due, though some exceptions may apply.

When it comes to the trust deed, you can sometimes draft a simple bare trust yourself. As with any legal arrangement, using a solicitor can help ensure the trust deed is legally sound, especially if you’re looking to pass on valuable assets or property.

When it comes to tax on bare trusts in the UK, the beneficiary pays tax just as if they owned the assets outright, so they may have to pay capital gains and income tax.

1. Capital gains tax (CGT) applies when an asset has increased in value when it is transferred, as this is treated as a disposal, or sale, by HMRC. In this case, the settlor is responsible for paying CGT. Similarly, the trustee may have to pay CGT if assets are sold on behalf of the beneficiary. However, if the assets are just being passed to the beneficiary, no capital gains tax is due. 

2. Any income generated by a bare trust – whether that’s from savings, investments, or rental income – is treated as the beneficiary’s own income. It’s taxed at their usual income tax rate, just like their earnings from work. So, even though the trustee is the name on the bare trust, the beneficiary is the one who includes it in their personal tax return.

3. Because the assets ultimately belong to the beneficiary, they are included in their estate for inheritance tax (IHT) purposes. Another instance of when IHT may be due is if the settlor dies within seven years of transferring assets into the trust. In that case, the assets could still count as part of the settlor’s estate.

Bare trusts can be a practical way to put aside funds for minors or anyone else who you might want to help out financially. However, they are not without their downsides.

• Bare trusts offer tax advantages for both the person setting it up and the beneficiary. The settlor may only have to pay capital gains tax when transferring assets to the trust. As a child, the beneficiary is unlikely to have any income, and anything they do earn is unlikely to exceed the £12,570 personal allowance for 2024/25, so they potentially pay no tax at all.
• Bare trusts are considered one of the easiest trusts to set up and manage, requiring less paperwork than other types. 
• Bare trusts can be useful for holding assets on behalf of children who aren’t yet able to own them directly, such as stocks or shares.
• Under bare trust rules, beneficiaries can access the assets before turning 18 (or 16 in Scotland), but only if the withdrawals are for their benefit and the trustees approve.

• Once set up, the beneficiary can’t be changed. This inflexibility can be an issue if more children are born after the trust is created, as these children would not be able to benefit from the assets.

• Every child is different, and some may not be prepared for the responsibilities of managing the assets they receive once they reach adulthood.

• The trustee has very little say over how the assets are managed. In contrast, a discretionary trust is another option that can give the trustee more influence over how and when the assets should be distributed to the beneficiary.

Trusts vary widely in terms of who has control over the assets within it, and when. If the goal is to build a pot of savings for children, other financial products may be worth considering.

• Discretionary trust. Trustees can decide how to use the trust income, giving them an extra level of flexibility and decision-making power for the benefit of the beneficiary.
• Interest in possession trust. Here, beneficiaries have the right to income from trust assets or to live in trust-owned property. However, they don’t own the assets themselves, which may be passed to another beneficiary in the future.
• Junior ISA. Parents can save up to £9,000 per year in a junior ISA completely tax-free. If you are still keen on investing for them, there is also the option of a junior stocks and shares ISA.
• Children’s and grandchildren’s savings accounts. These can also be a tax-efficient way of setting aside money for young children. As a bonus, you get them started early with learning about the value of money.
• Giving money to children or grandchildren can be an option for larger families. Any money gifted this way is exempt from inheritance tax if you survive for seven years after giving it.

A bare trust can be an effective way to gift assets or cash to your loved ones, but their inflexibility is a drawback. As an alternative, why not explore high-interest savings accounts? That way, you can build up your own pot of savings to give more to your loved ones. Compare the top rates on our marketplace then register for a free Raisin UK Account, apply for a savings account, and watch your savings grow!