Bare Trusts are commonly used to pass assets to children
The Trustees that are named as holders of these assets will be responsible for the Trust assets until the beneficiary turns 18 (in England and Wales, or 16 in Scotland). At that point the beneficiary has the right to demand the Trustees to transfer the fund to them.
Though Bare Trusts are sometimes known as ‘simple trusts’ they are inflexible. Once set up the beneficiary cannot be changed and they will have an absolute right to both income and capital within the Trust. One of the main benefits of this type of trust is that the person making the transfer will know for sure that the intended beneficiary will certainly benefit from the Trust.
However a disadvantage is of course that the beneficiary, at the tender age of 18 can demand full access to the capital and decide what to do with it.
Any income generated within a Bare Trust will be taxable against the beneficiary.
Similarly, if any capital gains are made within the trust then Capital Gains tax (CGT) may become payable. However the assets are treated for CGT purposes as if the beneficiary held them personally and so the annual allowance (£10,600 in 2012/13) can be used to generate gains without creating a liability to tax.
For the person passing money or assets into the Trust then the gift is known as a potentially exempt transfer (PET) for inheritance tax (IHT) purposes. If the person making the gift, e.g. typically a parent or grandparent, survives for seven years after putting the assets into trust then no liability to inheritance tax will arise.