Bare trust and tax treatment


(luke.summerford) #1

Advice would be welcome on whether this is a bare trust please.

The Settlor created a trust after being injured in a road traffic accident to receive the resulting compensation of £340k. The trust was created in February 2014 and the compensation was settled soon after. The Trustees (Mother and Sister of the Settlor) have purchased an investment property with trust funds that is generating rental income.

The Settlor since the accident has been in receipt of the disability living allowance at the highest rate.

The trust deed defines the beneficiary as the settlor.

The deed specifically states:-

" Absolute interest of the Beneficiary in all income of the Trust Fund

The Trustees may pay all or part of the income from the Trust Fund to or for the education maintenance and otherwise for the benefit of the Beneficiary and any undistributed income shall be held as an accretion to the Trust Fund for the Beneficiary absolutely.

Absolute interest of the Beneficiary in all the Capital of the Trust Fund

The Trustees shall hold the capital of the Trust Fund upon trust for the Settlor absolutely.

Death of the Settlor

For the avoidance of doubt on the death of the Settlor the Trust Fund as to both income and capital shall be transferred to the Settlor’s personal representatives to be paid in accordance with the trust’s powers and provisions relating to the Settlor’s estate. "

S.31 TA 1925 has been excluded.
S.32 applies except (a)
Otherwise the standard STEP provisions (2nd edition) apply.

If this is a bare trust rather than a disabled persons trust or discretionary trust, is the following treatment correct?

  • Income tax - income declared by the settlor as it arises and trustees do not file a tax return.
  • IHT & CGT - settlor treated as the beneficial owner of the property (not the trustees).
  • The special treatment under s.89 IHTA 1984 for trusts set up by disabled persons is not applicable.
  • TRS - no requirement to register.

If anyone has seen a similar trust I would be interested to know the benefits for the settlor and the purpose of such a trust.

Thank you in advance.

Luke Summerford
Watson Associates


(Paul Saunders) #2

By settling the personal injury award in this manner, whilst it remains within the trust the compensation received is treated as a disregard for means tested benefits.

Paul Saunders


(Julian Cohen) #3

Depending on eligibility, this s similar to a Special Needs Trust https://www.investopedia.com/terms/s/special-needs-trust.asp and may preserve eligibility for welfare benefits.

Julian Cohen

Simons Rodkin


(Malcolm Finney) #4

Income is declarable by the bare trust beneficiary not the trustees (irrespective of whether any payments of income are made to there beneficiary by the trustees).

Beneficiary is treated as the beneficial owner for CGT and IHT; a bare trust is not a settlement for either tax.

Under IHTA 1984 s89 the beneficiary has no entitlement to income/capital of the trust.

Not sure about registration.

Malcolm Finney


(luke.summerford) #5

Thank you for your answers.

It’s interesting that for tax purposes this is a bare trust yet for means tested benefits rules the assets are disregarded. As the income is declarable by the bare trust beneficiary I presume this will not affect their ongoing benefit entitlement?

Luke Summerford
Watson Associates


(Anthony Whittaker ) #6

Hi Luke

Currently there is no need to register if a bare trust as no liability arises at trust level as any tax liability is being incurred by the beneficiary. However, HMRC are exploring whether to extend the legislation to include non-tax paying trusts in the future which may include bare trusts.

Anthony Whittaker
BWM


(Malcolm Finney) #7

Whilst a little dated the following article m ay be of help:

https://www.lawgazette.co.uk/news/avoiding-the-benefits-trap-the-award-of-settlement-money-in-personal-injury-cases-may-mean-loss-of-your-clients-entitlement-to-benefits-/19830.article

Malcolm Finney