Varying a "Bare Trust"

I have a very simple “Declaration of Trust” that states that A & B hold the sum of £X for Y as Bare Trustees until Y attains 18.

There is then a separate full Discretionary Trust set up for Y.

The Trustees of the “Bare Trust” have asked whether it is possible to transfer the funds they hold to the Discretionary Trust.

I cannot easily see how this is possible given that we have a Bare Trust. My only thought is that assuming the Discretionary Trust allows for the addition of monies, the Trustees potentially need to wait until Y is 18 and then transfer funds to the Discretionary Trust with Y’s agreement.

Do forum members agree / have any views to the contrary?

Justin Wallace
Brewer Harding & Rowe

I agree. Assuming there are no express powers incorporating s.32 or similar (which would render it no longer a bare trust), they do not have the authority to settle the monies.
Andrew Goodman
Osborne Clarke LLP

The trustees of the bare trust will probably have the ability to pay or apply money for the benefit of Y (either under the terms of the trust or under s. 32 TA). In principle settling the monies might be for the benefit of Y (Re Pilkington) but cases where that is done tend to be limited to cases where Y’s entitlement is to be deferred rather than being defeated altogether (if there is a genuine and justifiable concern that becoming entitled to the funds at 18 will be detrimental to Y - which can only be determined when Y is approaching that age). In normal circumstances it is very hard to see how putting monies into a discretionary trust can be for Y’s benefit. If there are other reasons why the transfer is desirable (convenience / tax benefits?) then consider if the transfer could go ahead on a Re Pilkington basis if the trustees of the discretionary trust were to appoint a small part of their trust fund on trust for Y absolutely at age 18 and if the funds in the bare trust were then transferred to and added to that fund. The tax consequences need consideration.

Paul Davies

With a bare trust, the second Y turns 18, the money is his and it’s his decision if he wants to ‘give it’ to the DT. But don’t forget, he would then be a Settlor of that trust and so it may not be ideal.

Currently, the trustees cannot transfer to the DT as the money belongs to Y and they can’t put it into an environment where trustees have discretion as to who benefits and when.

Also, same issue with the settlor of the trust being different. It would make the periodic and exit charges calculation challenging.

Kamlesh Samji
KRS Estate Planning

Whilst I agree with Kamlesh on the practical taxation points, as
identified by Paul Davies the trustees have discretion under s.32
Trustee Act 1925 (unless specifically excluded) and could effectively
defer payment of the monies to Y beyond their 18th birthday.

Depending on the circumstances, this can validly be by settling on
discretionary trusts. However, if the trustees feel this would be the
right thing for Y, they should take appropriate legal advice as, by the
very nature of excluding Y from benefit, this is the type of action that
is more likely to be challenged, whether by Y or a third party on behalf
of(?) Y.

Paul Saunders

In a rare (yet stylish) reversal, I agree with the Pauls that the s.32 should be available by default as well as the caveat that it would have to be a very strong case to justify an advance onto discretionary trusts.

Andrew Goodman
Osborne Clarke LLP

If there were such an advance, my understanding is that no IHT charge would apply as there is thought to be no chargeable transfer by the infant. But there would be a disposal for CGT purposes.

Malcolm Gunn

M B Gunn & Co Ltd

HMRC are likely to resist the argument that there is no chargeable transfer, either on the basis that there is an omission to exercise a right by the beneficiary, generating a liability under s3(3) IHTA 1984, or there is a gift with reservation. Emma Chamberlain, in the book Trust Taxation and Estate Planning, refutes both these arguments but if the planning is widely used expects that HMRC would introduce blocking legislation.

Mark Woolley
Price Bailey