A bare or simple trust is one in which each beneficiary has an immediate and absolute title to both capital and income. The beneficiary of a bare trust is taxable on the trust income and gains. Beneficiaries must include trust income and gains in any Tax Return they are required to complete or in any forms R40.
The trustees of a bare trust may pay the tax due to HM Revenue & Customs on behalf of a beneficiary, but it is the beneficiary who is strictly chargeable to tax. The trustees are not required to make a tax return. They may complete the Trust and Estate Tax Return and account for any basic rate tax due on income. However, bare trustees cannot return capital gains or any gains on life insurance policies, life annuities or capital redemption policies; these continue to be the beneficiaries’ responsibility only.
It is up to the trustees to establish whether a trust is bare. If the trustees have access to legal advice they should ask their legal adviser whether the trust funds have ‘indefeasibly vested’ in the beneficiaries. If they have then the trust will be a ‘bare trust’.
In other circumstances the trustees will need to consider carefully the terms of the trust that they are administering. Does the trust
- impose conditions that must be fulfilled before the beneficiaries become entitled to the trust funds, or
- does it merely defer payment until the beneficiary reaches a particular age?
Example 1 – bare trust
Mrs A left the residue of her estate to such of her grandchildren as were alive at the date of her death.
She directed that the funds should not be paid to the grandchildren until they respectively attain age 21 years.
All of the grandchildren who were alive when Mrs A died are entitled to an equal share in the residue of the estate. There are no other conditions that they must fulfil before they become entitled. The direction about payment does not affect this basic position. The beneficiaries have a vested interest and the trust is a bare trust.
The income ought to be returned as the children’s own income and not that of the trustees.
Example 2 – bare trust
The trustees of a pension scheme decide under their discretionary powers to grant the sum of £20,000 to the child of a deceased member of the pension scheme. Because the child is only 9 years old they decide to appoint trustees to administer the fund and protect the child’s interests until she attains age 18 years. The terms of the appointment from the pension scheme were in favour of the child absolutely. This is a bare trust.
The income ought to be returned as the child’s own income and not that of the trustees.
Example 3 – not a bare trust
Mr B left the residue of his estate to ‘such of my grandchildren as survive me and attain age 21 years’. If any grandchild dies before age 21, his/her prospective share goes to the other grandchildren who do attain that age.
Here there are two conditions to be met before the grandchildren become entitled to their shares in the estate:-
- they must survive Mr B; and
- they must attain age 21 years
Here the grandchildren did not take immediate vested interests at the death of the testator. This is not a bare trust. The trustees must make a tax return.