Bare (Absolute) Trusts

 

Bare (Absolute) Trusts

​

A Bare Trust, also known as an Absolute Trust, is the simplest form of trust recognised under English law. Under a bare trust, the beneficiary has an immediate and absolute entitlement to both the income and capital of the trust, even though the assets are legally held in the name of trustees.

​

In substance, a bare trust is not about control or flexibility; it is about holding legal title on behalf of someone else, often for administrative, age-related, or practical reasons.

​​​

What Makes a Bare Trust Different?

​

The defining feature of a bare trust is that:

​

• The beneficiary is absolutely entitled

• Trustees have no discretion

• The trust must end immediately if the beneficiary demands the assets (provided they have legal capacity)

 

In other words, trustees are effectively nominees. They hold assets in their name, but they must act strictly in accordance with the beneficiary’s instructions.

​

This places bare trusts at the opposite end of the spectrum from discretionary trusts.

​

When Are Bare Trusts Commonly Used?

​

Bare trusts are typically used where simplicity and certainty are required, including:

Holding Assets for Minors

​

Bare trusts are frequently used to hold assets for children who are under 18. The trustees manage the assets until the beneficiary reaches adulthood, at which point the beneficiary can demand full control.

​

Gifting and Succession Planning

 

They are often used to make outright lifetime gifts, particularly where assets need to be held temporarily by trustees for administrative reasons.

 

Investment Accounts

 

Bare trusts are commonly used for investment platforms where legal ownership must sit with an adult trustee, but the economic ownership belongs to the beneficiary.

​

Compensation or Settlement Proceeds

 

Where funds are paid to a person who lacks legal capacity (for example, a minor), a bare trust may be used as a holding structure.

​

HMRC Tax Position – Very Clear and Straightforward

 

From HMRC’s perspective, bare trusts are transparent. The trust is largely ignored for tax purposes.

 

Inheritance Tax (IHT)

​

• Assets held in a bare trust are treated as belonging to the beneficiary, not the trustee

• The creation of a bare trust is treated as an outright gift to the beneficiary

• Normal IHT rules apply:

  • If the gift is made during lifetime, it is usually a Potentially Exempt Transfer (PET)

  • If the settlor survives seven years, the gift falls outside their estate

 

There are no ten-year charges and no exit charges.

 

Income Tax

​

• Income is taxed directly on the beneficiary

• The beneficiary’s personal allowances and tax rates apply

• Trustees do not pay trust-rate income tax

 

However, where a parent creates a bare trust for their minor child, the settlements legislation may apply. Broadly:

​

• If income exceeds £100 per year, it may be taxed on the parent rather than the child

 

This rule does not apply to gifts from grandparents or others.

 

Capital Gains Tax (CGT)

​

• Gains are treated as arising to the beneficiary

• The beneficiary’s annual CGT allowance applies

• Normal CGT rates apply based on the beneficiary’s circumstances

 

As with income tax, the trust itself does not create a separate tax regime.

​