Trusts can sound complicated, but they don’t have to be. One of the easiest types of trust to understand is called a Bare Trust.
What is a Bare Trust?
A Bare Trust is a legal arrangement where someone (called a trustee) holds money or assets for someone else (called a beneficiary). The trustee looks after the assets, but the beneficiary is the real owner and can take control of them when they reach a certain age- usually 18.
Whose Involved in a Bare Trust?
Within a Bare Trust there are 3 main people involved:
Settlor – This is the person who sets up the trust and puts money or assets into it.
Trustee – This is the person who looks after the money or assets until the beneficiary is old enough to take them.
Beneficiary – This is the person who will eventually get the money or assets. Legally they already own it but can’t have access to it yet.
Why Use a Bare Trust
People use Bare Trusts for a few reasons with the main being:
To hold money for children or young adults until they’re old enough to manage it themselves
To give gifts without handing over control straight away
To keep things simple while still making sure the gift legally belongs to someone else
For tax reasons, especially if the beneficiary is in the lower tax bracket
Example
Let’s say Sarah wants to give her 10-year-old nephew, Jack, a gift of £15,000 to help him with future university costs. She doesn’t want to just hand him the cash now because he’s too young.
So instead, Sarah sets up a Bare Trust, the settlor, with herself as the trustee and Jack as the beneficiary. She puts the £15,000 into the trust. The money stays in the trust until Jack turns 18. At that point, Jack can ask for the money and use it however he likes whether Sarah agrees with it or not.
This example highlights the importance of thinking about whether a Bare Trust is right for the circumstances as once the beneficiary turns 18, they do have full legal rights to the money.
Are Bare Trusts Taxed?
Even though the trustee holds the money, the tax responsibility usually falls on the beneficiary. This means any interest, dividends or income made by the trust is taxed as if the beneficiary earned it. Any capital gains (profits from selling investments) also belong to the beneficiary for tax purposes.
However, point to note, if a parent puts money into a Bare trust for their own child, and the income from that money is more than £100 a year, the parent then may have to pay tax on it. This rule was put into place to stop parents from trying to avoid tax by shifting money into their children’s names.
To conclude, Bare trusts are one of the simplest ways to hold money or assets for someone else. They’re perfect for situations where you just want to hold something safely for a young person until they’re old enough to manage it themselves.
If you’re thinking about setting one up, it’s always worth speaking to a Solicitor just to make sure it fits your needs and achieves what your wanting to put into place.
How can we help?
Please call our talented Trusts team on 0116 212 1000 or 01858 445 480, alternatively complete our free Contact Us form and we will get in touch as soon as possible.
Created by AI and checked by a qualified solicitor
