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Bare Trust

Also known as: Simple Trust, Absolute Trust

Definition

A bare trust is a simple trust arrangement where a trustee holds assets for a beneficiary who has the absolute right to receive them on demand once they reach adulthood (age 18 in England and Wales, 16 in Scotland).

Understanding bare trusts is essential when providing for children or grandchildren, as they're automatically created by law when minors inherit under a will, and they're a common vehicle for tax-efficient lifetime gifts to younger family members.

What Does Bare Trust Mean?

Under the Finance Act 2003, Schedule 16, a bare trust exists when property is held by a trustee for someone who is "absolutely entitled as against the trustee" - meaning the beneficiary has complete ownership with no conditions or restrictions. Also known as a simple trust or absolute trust, this is the most straightforward trust structure. The trustee is the legal owner but has no discretion whatsoever - they're essentially a placeholder holding assets until the beneficiary can take control. For tax purposes, the beneficiary is treated as the true owner from day one, even if they're currently too young to possess the assets. Bare trusts arise in two ways: deliberately created through lifetime gifts (such as a grandparent opening an investment account for a grandchild), or automatically by law when someone under 18 inherits under a will.

The practical operation of bare trusts centers on this absolute entitlement. Common uses include grandparents gifting to grandchildren, parents setting aside education funds, and holding inheritances for minors until they reach majority. The age threshold is crucial: 18 in England and Wales, 16 in Scotland (based on the Age of Legal Capacity (Scotland) Act 1991). At that age, beneficiaries can demand everything immediately, and trustees have no legal right to refuse or delay. The tax treatment makes bare trusts particularly attractive: because the beneficiary is the true owner, investment income and gains are taxed at their rate, not the trustee's. Margaret creates a bare trust with £20,000 for her grandson Oliver's future. The investment generates £800 annually. Because Margaret (not Oliver's parent) created the trust, this income is taxed at Oliver's rate - likely £0 due to his personal allowance - rather than Margaret's higher rate. However, there's a critical exception: the £100 parental income rule under s629 Income Tax (Trading and Other Income) Act 2005. When parents create bare trusts for their own minor unmarried children, if trust income exceeds £100 per year, ALL the income (not just the excess) is taxed as the parent's income until the child turns 18. James and Sarah set up a bare trust for their daughter Emily with £35,000, producing £1,200 annual income. Because Sarah is Emily's parent, all £1,200 is taxed at Sarah's 40% rate, costing £480 annually in tax. This rule doesn't apply to grandparents or other third parties - which is why grandparents often use bare trusts while parents should be more cautious.

The inflexibility of bare trusts is both their defining characteristic and greatest limitation. You cannot change the beneficiary once the trust is created - it's a completed, irrevocable gift. You cannot add conditions requiring the money be used for education, or delay access beyond age 18 in England and Wales (16 in Scotland). If you want such restrictions, you need a different trust structure entirely, such as a discretionary trust. Bare trusts also provide zero asset protection. Because the beneficiary is absolutely entitled, the law treats them as owning the assets outright. This means creditors, bankruptcy proceedings, and divorcing spouses can all make claims against assets in a bare trust. Only discretionary trusts, where beneficiaries have no absolute entitlement and trustees retain full discretion, can provide creditor protection. David's will leaves £75,000 to his nephew Tom, age 15. A bare trust is automatically created. When Tom turns 18, he can demand the entire sum - now worth £85,000 - regardless of his maturity or financial responsibility. The trustees cannot refuse, cannot impose conditions, and cannot protect the assets from Tom's creditors or poor decisions. If David had wanted ongoing protection and flexibility, he should have created a discretionary trust in his will instead.

Common Questions

"Can I set up a bare trust for my grandchildren to help with university costs, and what are the tax benefits?" Yes, grandparents can create highly tax-efficient bare trusts for grandchildren. Investment income and gains are taxed at the child's rate (often zero due to personal allowances), not yours. Crucially, grandparent gifts avoid the £100 parental income rule that affects parents. However, the child gains full control at age 18 and can use the money for anything, not just university.

"My parents left money to my 10-year-old daughter in their will - do I have any control over when she gets it?" No. When a will leaves money to a minor, a bare trust is automatically created by law. The trustees must hand over all assets when your daughter turns 18 (16 in Scotland). You cannot delay this or impose conditions. If you're concerned, ask the executors whether a deed of variation could create a discretionary trust instead, which would allow more flexibility.

"We put £30,000 in a bare trust for our son - why are we being taxed on the investment income when it's his money?" You're encountering the £100 parental income rule. When parents create bare trusts for their own minor unmarried children, if the trust generates over £100 income per year, ALL the income is taxed as the parent's income until the child turns 18. This rule prevents parents from income-splitting for tax advantages. Grandparents creating trusts are exempt from this rule.

Common Misconceptions

Myth: A bare trust protects my child's inheritance from creditors, divorce settlements, or bankruptcy.

Reality: Bare trusts provide zero asset protection. Because the beneficiary is absolutely entitled to the trust assets, those assets are treated as belonging to the beneficiary for all purposes. If your child faces bankruptcy, gets divorced, or is sued, assets in a bare trust are fully exposed to claims. Only discretionary trusts (where beneficiaries have no absolute entitlement) can provide creditor protection. This myth exists because people assume all trusts protect assets, but bare trusts are completely transparent for legal purposes.

Myth: I can add conditions to a bare trust, like requiring my grandchild to use the money for education or reach age 25 before accessing it.

Reality: You cannot add conditions to a bare trust - that's what makes it "bare" (stripped of conditions). The beneficiary has an absolute, unconditional right to the assets at age 18 (or 16 in Scotland). Any attempt to impose conditions means you're not creating a bare trust at all - you need a discretionary trust or age-contingent trust instead. This confusion arises because other trust types allow conditions, but the law is clear: beneficiaries can demand everything at majority, and trustees must comply.

Understanding Bare Trust connects to these related concepts:

  • Trust: A bare trust is the simplest form of trust structure, where the separation between legal ownership (trustee) and beneficial ownership (beneficiary) is most transparent.
  • Trustee: In bare trusts, trustees have the most limited role possible - they're custodians with no discretion who must hand over assets on demand.
  • Beneficiary: Bare trust beneficiaries have stronger rights than in any other trust type - they're treated as the true owners for tax and legal purposes.
  • Discretionary Trust: The main alternative to bare trusts, offering flexibility and control that bare trusts completely lack - trustees have full discretion rather than being obligated to hand over everything at a set age.
  • Minor: Minors cannot legally hold substantial assets themselves, so bare trusts provide a mechanism for adults to hold assets on their behalf until they reach the age of majority.
  • School Fees in Your Will: What Parents Should Know: Learn how bare trusts automatically arise when leaving money to children for education, and why you cannot restrict the funds to school fees only once the child turns 18.
  • Estate Planning Checklist: 10 Steps for 2025: Discover where bare trusts fit in your comprehensive estate planning strategy, particularly when providing for children and grandchildren tax-efficiently.
  • How to Protect Your Estate from Business Debts: Understand why bare trusts offer no asset protection and when discretionary trusts are essential for shielding inheritance from beneficiaries' creditors.
  • Discretionary Trusts in Wills Explained: Compare bare trusts (no trustee discretion) with discretionary trusts (full flexibility) to choose the right structure for your circumstances.
  • Property Protection Trusts for Homeowners: See why bare trusts are unsuitable for protecting property from care costs or divorce, and what alternatives provide genuine protection.
  • Using a Deed of Variation to Change a Will: Explore how to convert an unsuitable bare trust created by a will into a discretionary trust using a deed of variation within two years of death.

Need Help with Your Will?

Bare trusts can be an excellent tool for tax-efficient gifts to younger family members, but understanding when they're appropriate versus when discretionary trusts are better is crucial for effective estate planning.

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Legal Disclaimer: This glossary entry provides general information about bare trusts and does not constitute legal or tax advice. Bare trusts have significant legal and tax consequences that vary based on individual circumstances. Tax rules are complex and subject to change. The £100 parental income rule and other tax treatments described here are based on current HMRC guidance but may not apply to all situations. Creating a bare trust is an irrevocable decision - you cannot change the beneficiary or reclaim the assets once the trust is established. For advice specific to your situation, consult a qualified solicitor or tax adviser.