BARE TRUSTS: THE RIGHT TO BOTH INCOME AND CAPITAL
Bare trusts are similar to other trusts in that the settlor still appoints trustees who take legal ownership of the trust property. However, the beneficiary of a bare trust has a right to the income and capital of a trust, and can, if he so wishes, receive control of the property/actual ownership. The trustees must therefore act according to the beneficiary’s wishes.
Additionally, establishing a bare trust could provide the settlor with various tax advantages. A bare trust could be a viable way of leaving property to your children/grand-children, but also prevent them from receiving any benefits until they reach a certain age. This allows the settlor to retain a degree of control over the trust property.
The Role of a Trustee in a Bare Trust
Although trustees normally have discretion over what income they could pay a beneficiary from trust property, in a bare trust the person creating the trust has a greater role in directing the trustees. The trustees therefore have little/no discretion over what income to pay the beneficiaries. He/she is therefore more like a nominee – their control is in title only.
The Named Beneficiary in a Bare Trust
The named beneficiary holds an “absolute entitlement” to the assets in the trust, but the trustee(s) hold the assets until that person reaches a certain age (specified by the settlor). Once the beneficiary reaches that age, they are immediately able to receive the assets.
The Tax Advantages of a Bare Trust
One of the main advantages of a bare trust is the tax advantage it can give to the settlor. This is because the beneficiary holds an absolute entitlement in the trust property. The settlor therefore does not have to pay any tax on the assets, as they are relieved from the legal title once they transfer the assets. Therefore, if the beneficiary is a child it is unlikely they will be earning, and so will benefit from tax exemptions. Creating a bare trust to benefit from these exemptions is a tax-efficient method of securing assets for the future.
It is important to note that if a settlor attempts to create a trust in order to avoid potential inheritance tax, they may still be subjected to this if they should pass away within 7 years of the transfer. This only applies to transfers that are £3000 or more.
How Can You Create a Bare Trust?
If you are unsure about creating a bare trust yourself, then it is probably better to seek legal advice before taking this step. However, certain organisations, like banks and building societies, provide forms and information that will allow you to create a bare trust yourself. It should be noted that an invalidly created trust may cause serious repercussions for the people you attempted to make beneficiaries, and so you should try to gather as much information as you can before attempting to do this.
If you have located the correct forms and information, and are confident that you know what you are doing, the next step is to forward your completed forms to your local Tax Office.
Discretionary Trusts: An Alternative
The main difference between a bare trust and a discretionary trust is that with the latter, the trustees generally have discretion as to how to utilize the income the trust generates. They therefore have greater responsibilities regarding the distribution of trust income, and can provide beneficiaries who have not yet reached the age required to access their trust property with income. Powers may include being able to determine how much income is paid, and to which beneficiaries, how often payments will be made, and whether the trustees will place conditions on beneficiaries in receipt of this income.