Bare trusts taxation

Last Updated: 6 Apr 24 12 min read

What is a Bare Trust?

It is a trust where trustees hold property on trust for one or more beneficiaries absolutely. Each beneficiary has an immediate and absolute title to both capital and income.  Trustee powers are purely administrative.

HMRC Manual TSEM1563

"It is up to the trustees to establish whether a trust is bare. If the trustees have access to legal advice they should ask their legal adviser whether the trust funds have ‘indefeasibly vested’ in the beneficiaries. If they have then the trust will be a ‘bare trust."
Bare Trusts are commonly used to transfer assets to minors.

Firstly, consider intestacy. The intestacy rules in Scotland and Northern Ireland are different from England and Wales. In Scotland and Northern Ireland, where trusts are established for children who have lost a parent, the terms of those trusts will be such that they will be treated as Bare Trusts for tax purposes. In England & Wales, where minor children benefit under intestacy then a statutory trust arises. The child only becomes entitled when they turn 18 or get married if earlier. Prior to that, the child can benefit but nevertheless, until that time there is no Bare Trust. Where a bereaved minor is benefitting under intestacy laws in England & Wales, or there is a will where the child’s entitlement is delayed to a specific age (18 for example) then the Income Tax & CGT rules of discretionary trusts apply (before the child becomes entitled) unless a Vulnerable Person’s Election is made where the trustees are only paying tax in line with what the liability would have been had the income & gains arisen directly to that person.

Other than intestacy, a Bare Trust is created if an outright gift is made to a child – in a will or during lifetime – or if the child receives compensation payments in respect of an injury which the parents must invest on the child’s behalf.  The most common example is where an investment is made by a parent or grandparent for the irrevocable benefit of a minor child. This is tantamount to an outright gift, but the trustees act as nominees until the child can give a valid receipt. When the child reaches the age of 18, he or she can demand the assets held in trust are transferred into his or her name as absolute owner. In Scotland, the age limit is just 16.  If the beneficiary dies their share will pass under their will or intestacy.

Care should be taken when analysing wording to determine if a particular trust is Bare. For example, the HMRC Trusts, Settlements and Estates Manual contains these examples. Mr B left the residue of his estate to “such of my grandchildren as survive me and attain age 21 years. If any grandchild dies before age 21, his/her prospective share goes to the other grandchildren who do attain that age.”

Here there are two conditions to be met before the grandchildren become entitled to their shares in the estate:-

  • they must survive Mr B; and

  • they must attain age 21 years

Here the grandchildren do not take immediate vested interests at the death of the testator. This is not a bare trust.

This is a bare trust:

Mrs A left the residue of her estate to such of her grandchildren as were alive at the date of her death.

She directed that the funds should not be paid to the grandchildren until they respectively attain age 21 years.

All of the grandchildren who were alive when Mrs A died are entitled to an equal share in the residue of the estate. There are no other conditions that they must fulfil before they become entitled. The direction about payment does not affect this basic position. The beneficiaries have a vested interest and the trust is a bare trust.

The income ought to be returned as the children’s own income and not that of the trustees.

The inflexibility of Bare Trusts means that caution should be exercised particularly where large sums are involved.  They will not be appropriate when circumstances may change – for example when more children may be born, when there are second marriages, or when doubts exist as to the level of responsibility of young beneficiaries.

Taxation of a Bare Trust

The tax treatment reflects the fact that the trust is effectively ignored. Indeed Bare trustees originally did not need to register such trusts on the Trust Registration Service (TRS). That is no longer the case as Bare Trusts now need to be registered unless specifically excluded as an excluded express trust.

The exclusion that existed for them under 4MLD has been removed under 5MLD. There is also no carve out for trusts (bare and non-bare) holding a non-income producing investment bond. 

A Bare Trust is not a ‘settlement’ for IHT purposes and therefore a gift to a Bare Trust is a Potentially Exempt Transfer (PET) with the trust fund then falling inside the estate of the beneficiary.

Trustees are not required to complete a self- assessment tax return. 

Capital gains are taxed on the beneficiary and accordingly the beneficiary’s CGT exemption may be used. This applies regardless of the beneficiary’s age and relationship to the donor.

Income is also taxable on the beneficiary unless either of the two anti-avoidance rules below apply - 

Under ITTOIA/S624 income which arises under a settlement is treated for income tax purposes as the income of the settlor and of the settlor alone if it arises during the life of the settlor, and from property in which the settlor has an interest. A settlor is treated as having an interest in property if there are any circumstances in which the property or any related property is payable to the settlor or the settlor's spouse or civil partner, is applicable for the benefit of the settlor or the settlor's spouse or civil partner, or will, or may, become so payable or applicable.

Under ITTOIA/S629, where the settlor is a parent, then the income is taxed on the parent whether or not it is paid to the child. In this respect, ‘child’ refers to a minor child or step child of the settlor (who is neither married nor in a civil partnership). A step child includes the child of a civil partner. Where the total of the relevant settlement income of a child from settlements of one parent does not exceed £100 in any tax year, the legislation does not apply in that year. 

HMRC Manual TSEM4300

A parent creates a bare trust for a minor unmarried child on 1 January 2021. No payments are made out, and the trustees retain all the income which exceeds £100.

Although no income is paid to or for the benefit of the child ITTOIA/S629 applies to treat the income as that of the parent because the income belongs to the child.

HMRC Manual TSEM4310

A father makes regular gifts of cash to his two daughters aged 13 and 15 who deposit the money in building society accounts in their own names. The income arising to the children is £50 and £105 respectively and they have no other income. As the £50 income is less than £100, HMRC would not treat it as the father’s income. However, for the daughter whose interest was £105, HMRC would treat all the income as that of her father.

Income produced by assets placed in trust by grandparents for grandchildren will be taxed on the child even if it exceeds £100 pa.

Insurance company Bare Trusts

When faced with a suite of trusts offered by an insurance company, a key question is the client’s need to access funds.  If the client requires a regular payment stream with no other access then a Discounted Gift Trust (DGT) may be appropriate. If the client requires access to his/her original capital then a loan trust may be appropriate. If the client is prepared to give up access to all capital then a gift trust would be chosen. Typically these trusts will be available as either discretionary or absolute (bare).

The tax implications if a Bare Trust version is chosen for a particular beneficiary are as follows.

  DGT Loan Trust Gift Trust

IHT at set-up

Discounted* PET

No gift


Donor dies within 7 years

Discounted* PET becomes chargeable

7 year rule does not apply. Any outstanding loan balance included in donor’s estate for IHT purposes

PET becomes chargeable

Donor dies after 7 years

Discounted* PET becomes exempt

As above

The PET becomes exempt

IHT impact on death of beneficiary

Trust fund (i.e. bond value less the value of any donor’s rights) within the beneficiary’s estate

Trust Fund (growth on outstanding loan) is included within the beneficiary’s estate

Trust fund is included within the beneficiary’s estate

Chargeable event gains where parental settlement rules are not relevant

In tax years following the death of the donor, the beneficiary is taxed. For gains arising during the donor’s lifetime or in the tax year of the donor’s death, then see here

Taxed on beneficiary

Taxed on beneficiary

*In some occasions a discount won’t be available e.g. if client is in poor health or aged over 90.

Case law - Bare Trust without a Trust Deed

Back in 2007/08, Lily Tang, a midwife in the NHS earned just under £22,000 and received a modest amount of building society interest (taxed at source).  She considered her circumstances were such that she was not obliged to complete a tax return.  Her husband earned a little above average, working for the UK branch of the Singapore bank Oversea-Chinese Banking Corporation Ltd (“OCBC”).

In the 1990s, Mr Tang’s parents sold their UK restaurant business and retired to Hong Kong.

Back in April 2008, £422,000 was deposited in the London branch of OCBC in an account in Mrs Tang’s sole name.  The funds were transferred by her parents-in-law and derived partly from the sale of their restaurant business and partly from an inheritance.

Twelve months later, in anticipation that her husband might be posted to Singapore, the funds were transferred to an account with Standard Chartered Bank in Singapore in the joint names of Mr & Mrs Tang. In the end he remained in the UK.  The money was later transferred back to OCBC in November 2009. In 2010, it was then transferred to an account at Standard Chartered Bank (Hong Kong) Ltd in the joint names of Mrs Tang and her parents-in-law who remained resident in Hong Kong.  In 2017 the funds were finally returned to the parents-in- law on their instructions.

HMRC raised discovery assessments that Mrs Tang had paid insufficient tax and raised assessments for 2008/09 to 2015/16 for almost £100,000 in total. This represented tax and penalties. The magnitude of this figure reflected significant currency gains on trades made by Mrs Tang on the instruction of her parents in-law. In the eyes of HMRC, she had deliberately failed to notify her liability to tax.

Mrs Tang appealed.

The case was heard by the First Tier Tax Tribunal which concluded that Mrs Tang had no tax liability in relation to the OCBC and Standard Chartered accounts. Accordingly, the judge cancelled the assessments and penalties.  

Mrs Tang’s consistent position was that she was looking after the money on behalf of her parents-in-law. The money remained theirs. It was not a gift. She dealt with it in accordance with their instructions. She took no benefit from it, had never used any of the capital for herself or received any of the income and gains for her own benefit.

Despite there being no physical trust deed, it was decided that she did not hold the funds for her own benefit but instead  as bare trustee for her Hong Kong resident parents-in-law. Therefore, the income and currency gains did not belong to her and she was not taxable. Also, she transferred the funds back in 2017.

It is well settled under English law that a trust does not need to be in writing and may be made orally and given that, other evidence was considered to see if it was consistent with the existence of a trust.

  • A bank record from Standard Chartered noted that the account was in Mrs Tang’s name but noted “in trust for Jeffrey (sic) Tang”. It is not uncommon for bare trusts to be denoted in this manner.
  • It seemed unlikely that Mr or Mrs Tang had the knowledge to carry out successful currency trading.
  • Mr & Mrs Tang’s circumstances appeared relatively modest (she worked nights because childcare was so expensive).
  • If the money was a gift, why was it given to a daughter-in-law and not the son who was the blood relative?
  • The parents-in-law made a statement, in 2017, to BDO accountants setting out a coherent and credible account of where the money came from and why it was dealt with as it was. This emphasised that Mrs Tang was the legal owner of the funds but the parents-in-law were the beneficial owners.
  • The original deposit date of April 2008 coincided with a health scare suffered by the parents-in-law when the funds were transferred as a crude means of protecting the money for the grandchild, Geoffrey Tang, the ultimate beneficiary.

The Tribunal decision therefore demonstrated and re-stated the fact that a bare trust can exist without a trust deed provided that other information exists to evidence the trust’s existence. 

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