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A bare trust is so called because it is a very basic form of trust.
In a bare trust, beneficiaries have the absolute right to the capital and assets within the trust, as well as the income generated from these assets.
Bare trusts are widely used by parents and grandparents to transfer assets to their children or grandchildren (the trustees look after them until the beneficiary is old enough).
The trustee has no discretion in directing the trust's income or capital.
Key features of bare trusts:
You leave your sister some money in your will. The money is held in trust.
Your sister is entitled to the money and any income (for example interest) it earns. She can also take possession of any of the money at any time.
Disadvantages of Bare Trusts:
Beneficiaries may also be responsible for paying inheritance tax if the trust settlor dies within 7 years of establishing the trust because bare trusts are treated by tax authorities as potentially exempt transfers.
No inheritance tax will be owed, however, if the settlor outlives those 7 years. There is no tax implication for the individual who sets up a bare trust because he/she gives up legal title to the assets when they are transferred to the trust.
Trusts are set up for a number of reasons, including:
If you’re the beneficiary of a bare trust you’re responsible for paying tax on income from it.
You need to tell HMRC about the income on a Self Assessment tax return.
If you do not usually send a tax return, you need to register for self-assessment by 5th October following the tax year you had the income.
A bare trust can be a useful solution, but whether it is applicable has to be determined on a case-by-case basis, as does the case for using trusts in general.
NOTE: Because trusts are so unique to each individual, it’s impossible to give them a rating for their overall performance and suitability. Therefore these reviews do not come with a star rating.