What is a bare trust?
A bare trust, also known as simple trust, is when an individual takes over all of an asset’s trust benefits. This individual that we can call the beneficiary also has the right to the trust’s capital and all the income or interest that the trust generates.
Bare trusts, trustees, and beneficiaries
We call the person who arranges the trust a trustee. The trustee may arrange any asset such as money or properties to any beneficiaries they want. However, the trustee should be sure enough about their chosen beneficiaries since he cannot change the beneficiaries anymore. The trustee can use the bare trust to anyone, even for minors. Commonly, parents or grandparents transfer a bare trust to a minor or even a baby. The only time they get a hold of the trust is when they are old enough or at least 18 years of age. They can ask the trustees to transfer their trust.
After naming a beneficiary, the beneficiary will now have all the discretion over the income and capital even though the asset is still under the trustee’s name.
An example scenario of a bare trust
Salvador writes his will, and he put his son Levi as the beneficiary of some of his money and real estate properties, then the trust will hold the assets. Today, Levi is just 16 years old, so he is still a minor. It means that it is not yet possible to transfer the assets to him. However, after two years, he can already ask his father Salvador to transfer those to him at any time. After the transfer, he can now use the assets like money for business, school, or anyway as he pleases as he has the right to both the capital and income that money incurs because of the bare trust.
Related taxes to bare trusts
There are taxes that a beneficiary needs to know upon receiving a bare trust. Listed below are some of the significant taxes with explanations in line with our previous example and bare trusts:
In our previous example, when Levi reaches 18, he will be liable for all the income taxes as if he holds the trust under his name. Salvador can also pay for it, but Levi should be the one responsible for the income taxes. He needs to account for the income tax or capital gains in his self-tax return on the SA 100 form section.
Levi is also responsible for the capital gains, wherein he should also declare the chargeable gains that the asset incurred on the self-assessment tax return.
But what is a capital gain tax? If Levi sold the property that his father Salvador gave him, and the profit is above a certain level, then capital gains tax applies. There is a charge if the profit is more than the set annual exempt amount.
The assets placed under the bare trusts are potentially exempt transfers. It is only the case if Salvador suddenly dies within seven years after writing Levi as a beneficiary. Levi will be responsible for any due inheritance tax because he owns the income and capital.