Bare Trusts – Low Maintenance and Straightforward (Mostly!)

Brian Radbone, our Head of Technical Services, explores how bare trusts are established and some upcoming changes.

Bare (or absolute) trusts are typically set up for children and grandchildren with trustees holding the assets on behalf of the child who can then demand access from age 18 (16 in Scotland). Any tax arising on the investments held will, in most cases, be set against the child’s tax allowances and the value will form part of the child’s estate for IHT purposes. An exception is where the gift is made by a parent to a minor child and the income arising in a tax year exceeds £100 in which case the parent is liable for tax on all the income.

Bare trusts can also be established within a will, but it can be more challenging determining whether the trust is indeed a bare trust. For example, a will states:

‘I leave my residuary estate to such of my grandchildren that survive me and attain age 25, but if any grandchild should die before attaining age 25 their share should be passed to the other grandchildren who do attain age 25.’

As the grandchildren must satisfy both conditions to obtain their share, this is not a bare trust. It would be a bare trust if the will, however, stated:

‘I leave my residuary estate to such of my grandchildren that survive me but with payment not being made until they attain age 25.’

This is because they have an immediate vested interest which is not affected by the fact that payment cannot be made until they attain age 25.

From 1 September 2022 all bare trusts, whether created by deed or by designation, must be registered on HMRC’s Trust Registration Service. When a client sets up a designated GIA for a child or grandchild, whether it is a bare trust will depend on the client’s intention at the time. Was an irrevocable gift made at the time, or was it an amount set aside by the client to gift at some point in the future? If the former then it must be registered.