Bare Trusts in UK Tax Planning: Uses, Advantages, and Pitfalls

The bare trust is the most straightforward form of trust arrangement in English law. Unlike discretionary trusts or interest-in-possession trusts, a bare trust confers no discretion on the trustee and gives the beneficiary an immediate and absolute right to both the income and the capital of the trust. This simplicity carries significant implications for both the practical utility of bare trusts and their tax treatment.

For high-net-worth individuals engaged in estate planning, school fees planning, or intergenerational wealth transfer, bare trusts occupy a distinct and valuable position in the planning toolkit — but they also come with limitations that must be understood.

What Is a Bare Trust?

A bare trust (sometimes called a simple trust or naked trust) is a trust arrangement in which:

• The trustee holds the legal title to assets on behalf of the beneficiary
• The beneficiary has an immediate, indefeasible right to the assets — both income and capital
• The trustee has no discretion over distributions, timing, or investment within the trust (beyond the standard investment duties)
• The beneficiary can, if they have legal capacity (i.e. they are an adult), call for the assets to be transferred to them at any time under the rule in Saunders v Vautier

In essence, the trustee under a bare trust is little more than a nominee — a legal title-holder acting on the absolute instructions of the beneficial owner.

Tax Treatment of Bare Trusts

Income Tax

For income tax purposes, a bare trust is transparent. The income of the trust is treated as the income of the beneficiary directly — it is reported on the beneficiary's personal tax return (or by the parent if the beneficiary is a minor child, subject to the parental settlor rules discussed below).

Because the beneficiary is treated as directly receiving the income, the trust's income does not suffer the higher trust income tax rate (45% for most trust income under the current regime). Instead, it is taxed at the beneficiary's marginal rate.

Capital Gains Tax

For CGT purposes, a bare trust is also transparent. The beneficiary is treated as the owner of the underlying assets for CGT purposes. When assets are disposed of, any gain is calculated at the beneficiary's rates using the beneficiary's CGT annual exempt amount (to the extent not otherwise used).

This transparency is particularly useful where the beneficiary is a lower-rate taxpayer or has unused CGT annual exempt amounts. Gains within the bare trust are taxed at the beneficiary's CGT rate rather than the trust CGT rate (which, since 30 October 2024, is 24% for trustees on both residential property and other assets).

Inheritance Tax

Assets held in a bare trust fall within the beneficiary's estate for IHT purposes. This is a direct consequence of the beneficiary's absolute beneficial entitlement — the assets are treated as belonging to the beneficiary, not the settlor (provided the settlor did not retain a benefit or control). This means a bare trust does not offer the same IHT "relevant property" periodic charge and exit charge regime that applies to discretionary trusts.

For IHT purposes, the gift of assets into a bare trust (where no consideration is received and the settlor does not retain benefit) is a potentially exempt transfer (PET). Provided the settlor survives seven years from the date of the gift, no IHT is due on the transfer. If the settlor dies within seven years, taper relief reduces the IHT charge on a sliding scale.

This is a critical advantage over discretionary trusts, which — for substantial gifts — attract an immediate 20% lifetime charge on amounts over the available nil-rate band.

Trust Registration Service

Bare trusts are exempt from registration on the UK Trust Registration Service (TRS), provided they hold only specified simple assets (such as cash or quoted equities held for the absolute benefit of the beneficiary) and were not created by express declaration of trust for a purpose other than holding assets for a single beneficial owner. However, some bare trusts with more complex asset profiles or that fall outside the narrow TRS exemption may be required to register. Professional advice should be taken in cases of doubt.

Common Uses of Bare Trusts

Children and Grandchildren

The most widespread use of bare trusts is to hold assets for minor beneficiaries — typically children or grandchildren. A bank account or investment portfolio can be held in the name of trustees (often the parents or grandparents) for the absolute benefit of the child. When the child reaches adulthood (age 18 in England and Wales), they become entitled to call for the assets.

This is the basis of many Junior ISA strategies and investment accounts opened for children. The tax transparency means that investment income and capital gains accumulate largely outside the parents' tax position — subject to the important parental settlor rule below.

The parental settlor rule: where a parent settles assets into a bare trust for their minor unmarried child, the settlor attribution rules (section 629 ITTOIA 2005) apply. Income arising to the child from the parent's gift is taxed on the parent to the extent it exceeds £100 per year. This applies until the child reaches 18 or marries. The rule is designed to prevent parents from diverting income into the hands of their lower-taxed children. Grandparents and other third-party settlors are not subject to the £100 parental income rule.

Capital gains, however, are not subject to the same parental attribution — CGT on gains within a bare trust for a minor child is assessed on the child, not the parent, in all cases. This makes bare trusts an effective vehicle for holding growth assets for children where the capital gain will be realised after the child reaches majority (or where the child has CGT annual exempt amounts available).

Nominee Arrangements for Investments

In practice, many investment platform holdings are held under bare trust arrangements. A nominee company holds legal title to shares, bonds, or funds on behalf of the investor as beneficial owner. The investor reports income and gains directly on their own tax return — the nominee structure does not alter the tax position.

Pre-Deceased Spouse Planning (IPDI)

While not strictly a bare trust, immediate post-death interests in possession (IPDI) created by Will on death share some characteristics with bare trusts for IHT purposes. They are treated as part of the beneficiary's estate for IHT.

CGT Uplift on Death

Assets held in a bare trust acquire a CGT-free uplift to market value on the death of the beneficiary (because the assets are treated as forming part of the beneficiary's estate). This can be a valuable consideration when structuring the holding of appreciating assets.

Bare Trusts vs Discretionary Trusts

The choice between a bare trust and a discretionary trust depends on the planner's objectives:

Feature	Bare Trust	Discretionary Trust
Beneficiary's entitlement	Absolute	Subject to trustee discretion
Income tax rate	Beneficiary's personal rates	Up to 45% (trust rate)
CGT rate	Beneficiary's rates	24% (trustee rate, all assets)
IHT on gift in	PET (7-year rule)	Chargeable lifetime transfer (20% if over NRB)
IHT periodic charges	None	6% every 10 years on value above NRB
Flexibility	Low — beneficiary can demand assets	High — trustees manage for class of beneficiaries
Protection from creditors	Low — assets in beneficiary's estate	Higher — assets in trust, not beneficiary's estate
TRS registration	Generally exempt	Generally required

For protecting assets from beneficiaries' creditors or divorcing partners, or where flexibility over which beneficiaries ultimately benefit is important, a discretionary trust is generally preferable. Where the goal is simple intergenerational transfer with tax efficiency, a bare trust can be more appropriate.

Practical Pitfalls

1. Loss of control. Once assets are in a bare trust, the beneficiary has an absolute right to them on reaching adulthood. A 21-year-old who is not financially sophisticated can demand their share immediately — there is no mechanism to defer access.

2. Parental settlor rule. As noted above, parents should be aware that income on bare trusts funded by parental gifts will largely be attributed back to them during the child's minority.

3. Documentation. Bare trusts do not always require a formal trust deed, but proper documentation of the arrangement is strongly advisable to establish the date of the gift (relevant for PET purposes), the identity of the beneficiary, and the trustee's role.

4. Tax returns. Beneficiaries of bare trusts must report trust income on their own Self Assessment returns. For minor children with no other income, registration with HMRC as a taxpayer may be required if income exceeds the personal allowance.

5. Non-UK assets. Bare trusts holding overseas assets may have reporting obligations in the asset's jurisdiction. Professional advice should be taken before establishing a bare trust holding non-UK investments.

How Global Investments Can Help

Bare trusts are simple in concept but require careful implementation to ensure they achieve their planning objectives. Global Investments works with high-net-worth families to:

• Identify whether a bare trust or an alternative structure (discretionary trust, FIC, bare holding account) is appropriate for their circumstances
• Advise on the most tax-efficient assets to place in bare trusts for children and grandchildren
• Coordinate with solicitors to ensure documentation is correctly drafted and executed
• Review existing bare trust arrangements to ensure compliance with current rules, including any TRS obligations
• Plan the transition of trust assets to beneficiaries on reaching adulthood

Tax treatment depends on individual circumstances and may change in future. This guide is accurate as of June 2026 but should not be relied upon as legal or tax advice. Always seek qualified professional advice tailored to your specific circumstances.

Contact Global Investments to discuss how bare trusts might fit into your family's wealth planning.