Bare trusts—income tax and CGT
Bare trusts—income tax and CGT

The following Private Client guidance note provides comprehensive and up to date legal information covering:

  • Bare trusts—income tax and CGT
  • Income tax
  • CGT
  • Example—income tax and CGT treatment of bare trustees
  • Compliance
  • Bare trust situations

This Practice Note explains how trustees of bare trusts are treated for income tax and capital gains tax (CGT) purposes. Although a bare trust is, in equity, a type of trust, for both income tax and CGT purposes its existence is ignored. This means that no tax liability falls on the trustees in respect of their income and chargeable gains. Rather, the two tax regimes target and tax the beneficiary of such a trust at the beneficiary's rates of tax.

Income tax

The legislation, in the Income Tax Act 2007 (ITA 2007), which sets out the income tax rules for settlements, excludes bare trusts from those rules. There are various provisions in ITA 2007 which treat the actions of a bare trustees as if they are actions of the absolute beneficial owner.

The following rules are established by case law:

  1. any income arising to a bare trustee is assessable on the beneficiary as they are absolutely entitled to that income (with the exception of income arising during the life of the settlor and paid to or for the benefit of the settlor’s minor children, see ‘Assets held for minor children’ in Bare trust situations below)

  2. the beneficiary must declare any income on their personal tax return

  3. although the bare trustee may pay income tax on behalf of a beneficiary, it is