Bare Trust Inheritance Tax UK: How Bare Trusts Are Taxed for IHT, CGT, and Income Tax (2026)
A bare trust is the simplest IHT-planning trust: no periodic charges, no exit charges, RNRB preserved, and a PET on creation. The trade-off is zero flexibility — the beneficiary is fixed from day one.
| Feature | Bare Trust | IPDI Trust | Discretionary Trust |
|---|---|---|---|
| IHT at creation | PET (s3A IHTA 1984) — outright gift to individual; 7yr clock; IHT-free after 7yr; no IHT at creation if within NRB + exemptions | Immediate PET via will (IPDI — s49A IHTA); or PET if settlor alive and creates IPDI; in life tenant's IHT estate immediately | CLT (chargeable lifetime transfer) — 20% IHT immediately if above NRB (£325k); 10yr lookback |
| Periodic charges (s64 IHTA) | NONE — bare trust is NOT relevant property; no 10-year charge | NONE — IPDI is not relevant property while life tenant alive; periodic charges arise if IPDI terminates in favour of discretionary trust | YES — up to 6% of trust value every 10 years (s64 IHTA 1984); complex calculation based on relevant property value |
| Exit charges (s65 IHTA) | NONE — distribution from bare trust to absolutely entitled beneficiary = no exit charge (not relevant property) | Exit charge if IPDI terminates in favour of discretionary trust or non-qualifying beneficiary | YES — exit charge on distributions from the trust (s65 IHTA); reduced rate applies to early exits in first 10yr |
| RNRB (Residence Nil-Rate Band) | AVAILABLE — beneficiary absolutely entitled = treated as direct descendant beneficiary; s8D IHTA 1984 RNRB applies; up to £175k per person | AVAILABLE — s8H IHTA 1984 preserves RNRB for IPDI trusts where life tenant is surviving spouse and remainder to direct descendants | LOST — property in discretionary trust does NOT pass to direct descendants for RNRB; RNRB not available; up to £70k IHT cost per person |
| CGT treatment | Gains taxed as beneficiary's gains; beneficiary uses own annual CGT exemption (£3,000 in 2026/27); trustee and beneficiary must both report; parent-for-minor = parental settlement income rule (ITTOIA s629) | Life tenant taxed on trust income; CGT on trust gains above trust annual exempt amount; death of life tenant = CGT uplift (s73 TCGA 1992) — no CGT on gain | Trust's own annual CGT exempt amount (£1,500 in 2026/27 — half individual allowance); gains taxed within trust at 20% (non-residential) or 24% (residential property); no uplift on trust distribution |
| Flexibility — changing beneficiaries | NONE — absolutely entitled beneficiary; trustee cannot redirect; any change = new taxable disposition (new PET or CGT disposal at market value) | LIMITED — life tenant is fixed; remainder beneficiary usually fixed at creation; life tenant termination triggers IHT charge | MAXIMUM — trustees can add/remove beneficiaries, accumulate income, vary shares; but IHT charges apply (periodic/exit) |
| Income tax | Income taxed as beneficiary's income at their marginal rate; parental settlement rule (ITTOIA s629): if parent settles and child under 18, income > £100/yr taxed at parent's rate | Trust income flows to life tenant; taxed at life tenant's marginal rate; 45% trust rate if trust accumulates income | Trust pays income tax at 45% (or 8.75% on dividends → 39.35% standard rate); beneficiaries receive trust income net with credit |
Bare trust: beneficiary absolutely entitled; assets in beneficiary's IHT estate; NOT relevant property (s58 IHTA 1984); no periodic charges (s64 IHTA); no exit charges (s65 IHTA); creation = PET (s3A IHTA — 7yr clock); RNRB available if direct descendant beneficiary (s8D/s8K IHTA). CGT: beneficiary's gains; beneficiary's annual exempt amount (£3,000 in 2026/27). Income tax: beneficiary's income; parental settlement rule (ITTOIA s629) for settlor-parent with minor child beneficiary (income >£100/yr taxed at parent's rate). No flexibility: cannot change beneficiary without new taxable disposition. IPDI: s49A IHTA 1984 — in life tenant's estate; RNRB preserved (s8H IHTA); no periodic/exit charges; CGT uplift on life tenant's death (s73 TCGA). Discretionary trust: relevant property (s58 IHTA); CLT at creation (20% if above NRB); periodic charges s64 (up to 6%/10yr); exit charges s65; RNRB LOST; maximum flexibility. Trust registration: all UK express trusts must be registered with HMRC Trust Registration Service (HMRC TRS) — bare trusts with UK tax consequences are included. England and Wales law.
Bare Trusts and IHT: Complete Guide
What is a bare trust and how does it work for IHT?
A bare trust is the simplest form of trust: the trustee (who may be a parent, friend, or solicitor) holds legal title to assets for one or more named beneficiaries who are absolutely entitled to the assets — meaning they can demand the assets (and any income) at any time, subject to reaching age 18 in England and Wales (s31 Trustee Act 1925 until reaching majority). The critical IHT principle: because the beneficiary is absolutely entitled, the assets are treated as BELONGING TO THE BENEFICIARY for IHT purposes — they form part of the beneficiary's IHT estate on death, not any separate trust estate. The trustee holds the assets as a bare legal owner, not as a beneficial owner. IHT on creation: when the settlor (the person creating the bare trust) transfers assets into a bare trust for a named beneficiary, this is treated as a gift from the settlor to the beneficiary. For IHT: this is a PET (potentially exempt transfer — s3A IHTA 1984) — an outright gift from one individual (the settlor) to another individual (the beneficiary). The 7-year IHT clock starts on the date the bare trust is created (or the date of transfer of specific assets into the trust). If the settlor survives 7 years: the gift is permanently IHT-exempt. If the settlor dies within 7 years: the PET becomes chargeable; IHT applies to the value of the gift at the date of the gift (above the NRB, with taper relief in years 3-7). Annual exemption (s19 IHTA) and other exemptions can reduce the PET amount at creation.
No periodic or exit charges — why bare trusts have no ongoing IHT
One of the most significant IHT advantages of a bare trust is that it falls OUTSIDE the 'relevant property' regime that applies to discretionary trusts. Under s58 IHTA 1984, relevant property is settled property that is NOT: (a) in the estate of a beneficiary with an interest in possession; (b) a charitable trust; or (c) a number of other excluded categories. A bare trust is NOT a relevant property trust because the beneficiary is absolutely entitled — the property IS in the beneficiary's estate. Consequence: NO 10-year periodic charge (s64 IHTA 1984 — up to 6% of trust value every 10 years), and NO exit charge (s65 IHTA 1984 — on distributions from the trust). A discretionary trust of £1,000,000: approximate 10-year periodic charge = £15,000-£60,000 (depending on available NRB and calculation method). A bare trust of £1,000,000: 10-year periodic charge = £0. Exit from the bare trust: when the trustee distributes to the absolutely entitled beneficiary (upon the beneficiary reaching age 18, or earlier if the beneficiary requests earlier), there is NO IHT exit charge. The distribution is simply the trustee handing over property to which the beneficiary was always entitled. This contrasts with a discretionary trust, where each distribution potentially triggers an exit charge calculation.
RNRB and bare trusts — when the family home can pass via a bare trust
The Residence Nil-Rate Band (RNRB — s8D IHTA 1984, £175,000 per person in 2026/27) is available where a qualifying residential interest passes to or is inherited by a direct descendant (s8K IHTA 1984). A key planning point: if the family home is held in a bare trust for a direct descendant (e.g., a will leaves the home in a bare trust for children or grandchildren), the RNRB DOES apply — because the beneficiary is absolutely entitled, the property is treated as passing directly to the direct descendant. This is explicitly confirmed by HMRC's interpretation: a bare trust bequest to a direct descendant qualifies for RNRB. Contrast with a discretionary trust: if the will places the family home in a discretionary trust (even one whose only potential beneficiaries are children), the RNRB is LOST. HMRC takes the view that property in a discretionary trust does not 'pass to' a direct descendant — it passes to the trust. This means each person in a couple with a home in a discretionary trust loses up to £70,000 per person (£140,000 combined). A bare trust for named direct descendant beneficiaries avoids this RNRB loss. The trade-off: the bare trust offers no flexibility (cannot change beneficiaries without a new taxable disposition), while a discretionary trust offers flexibility but at the cost of the RNRB. Practical will drafting: many solicitors use a 'bare trust' or 'absolute gift' clause for the home in a will, directing it to named children absolutely (or via a bare trust), to preserve the RNRB.
CGT and income tax in bare trusts
CGT in bare trusts: the beneficiary is treated as owning the trust assets for CGT purposes. Gains in the bare trust are the beneficiary's gains and are reported on the beneficiary's tax return. The beneficiary's own annual CGT exempt amount (£3,000 in 2026/27) applies to trust gains — no separate trust CGT exempt amount (the trust does not have its own reduced allowance as a discretionary trust would). Where the trustee sells an asset within the bare trust, the gain is attributed to the beneficiary; the beneficiary reports it on their self-assessment. Income tax in bare trusts: trust income is the beneficiary's income, taxed at the beneficiary's marginal rate. If the beneficiary is a basic-rate taxpayer: 20% income tax on interest; 8.75% on dividends; 20% on rental income. Parental settlement rule (ITTOIA 2005, s629 — England and Wales): where a parent creates a bare trust for their minor child (under 18), income exceeding £100 per year from the settlement is taxed at the PARENT's marginal rate (not the child's rate). This is an anti-avoidance rule designed to prevent parents from sheltering high-income investments in children's accounts where the child has little or no income tax liability. Note: the £100/yr threshold is per parent's settlement; the rule does not apply to gifts from grandparents (no ITTOIA s629 issue for grandparent-to-grandchild bare trusts). Junior ISAs: a JISA held in the child's name is NOT a bare trust — it is the child's own account; income and gains are tax-free in the ISA wrapper; s629 does not apply.
Practical uses and limitations of bare trusts for IHT planning
Common uses of bare trusts for IHT planning: (1) Gifts to children or grandchildren: a parent or grandparent places cash or investments in a bare trust for a named child beneficiary. A PET is created (7yr clock starts). The assets grow outside the settlor's estate. No periodic or exit charges. On the child's 18th birthday (or earlier if the child demands and the trustee agrees), the assets are transferred outright. Ideal for long-term gifting programmes where the settlor is confident they will survive 7 years. (2) Life insurance in a bare trust for named beneficiary: if a life insurance policy is placed in a bare trust for named beneficiaries, the death benefit is: (a) outside the insured's IHT estate (no probate needed; the trustee pays the named beneficiary directly); and (b) no periodic or exit charges (not relevant property). This is simpler than a discretionary trust where the trust deed must be carefully drafted to avoid the relevant property regime. (3) JISA-equivalent designated accounts: some investment accounts for minors are designated in the parent's name 'as trustee for' the child — these are bare trusts. (4) RNRB preservation in wills: as above — bare trust for named direct descendant beneficiary preserves the RNRB. Limitations: (a) No flexibility: once created, the trustee cannot redirect assets to another beneficiary without a new taxable disposition; (b) Beneficiary has right to demand assets at 18 — the parent cannot retain control beyond that point; (c) Parental settlement income rule (ITTOIA s629) applies to minor children of the settlor-parent — high-income assets may be inefficient; (d) Bare trust has no separate CGT exempt amount from HMRC — the beneficiary uses their own allowance; for a high-earning adult beneficiary, this provides less shelter than for a basic-rate taxpayer.
Frequently Asked Questions
Is a bare trust subject to inheritance tax?
Yes — but in a specific way. The assets in a bare trust are treated as part of the BENEFICIARY's IHT estate (not a separate trust estate) because the beneficiary is absolutely entitled. Creating a bare trust is a PET (potentially exempt transfer — s3A IHTA 1984): the settlor makes a gift to the beneficiary and the 7-year IHT clock starts. If the settlor survives 7 years: the gift is IHT-exempt. If the settlor dies within 7 years: the gift is chargeable and may attract IHT (with taper relief in years 3-7). Bare trusts do NOT have 10-year periodic charges (s64 IHTA) or exit charges (s65 IHTA) — they are not 'relevant property' trusts. On the beneficiary's death, the bare trust assets are included in the beneficiary's taxable estate at their value at date of death.
Does a bare trust qualify for the Residence Nil-Rate Band (RNRB)?
Yes — where the family home passes via a bare trust to a direct descendant (child, grandchild, step-child, foster child — s8K IHTA 1984), the RNRB (s8D IHTA — up to £175,000 per person) APPLIES. This is because the bare trust beneficiary is absolutely entitled to the property — it is treated as passing directly to the direct descendant for RNRB purposes. Contrast with a discretionary trust: placing the home in a discretionary trust (even one whose only beneficiaries are children) LOSES the RNRB — the home does not pass 'to' the direct descendant, it passes to the trust. The difference is worth up to £70,000 per person in IHT. Practical will drafting: leave the home outright (or via a bare trust for named children) rather than into a discretionary trust if RNRB preservation is a priority.
What are the CGT rules for a bare trust?
For CGT purposes, the beneficiary of a bare trust is treated as owning the underlying assets — they use their own annual CGT exempt amount (£3,000 in 2026/27) and their own CGT rates. The bare trust does not have a separate, reduced CGT exempt amount (unlike discretionary trusts). When the trustee sells or transfers assets within the bare trust, any gain is attributed to the beneficiary and reported on the beneficiary's self-assessment tax return. Where the settlor was a parent and the beneficiary is the settlor's minor child (under 18): any income generated in the trust is subject to the parental settlement rule (ITTOIA 2005, s629) — income above £100/yr is taxed at the parent's marginal rate. This rule applies to INCOME, not capital gains. Gains are taxed at the child's own rates regardless of the settlor's identity.
What is the difference between a bare trust and a discretionary trust for IHT?
The key IHT differences: (1) IHT on creation: bare trust = PET (s3A IHTA — 7yr clock; no immediate IHT); discretionary trust = CLT (chargeable lifetime transfer — 20% IHT immediately if above NRB; potentially no IHT if within NRB). (2) Periodic charges: bare trust = NONE (not relevant property); discretionary trust = up to 6% of trust value every 10 years (s64 IHTA). (3) Exit charges: bare trust = NONE; discretionary trust = exit charge on distributions (s65 IHTA). (4) RNRB: bare trust = AVAILABLE (absolutely entitled beneficiary); discretionary trust = LOST (property in trust, not passing to direct descendant). (5) Flexibility: bare trust = NONE (beneficiary is fixed; cannot redirect assets); discretionary trust = MAXIMUM (trustees can add/remove beneficiaries, accumulate income, vary shares). Which to use: bare trust is best where you know who should receive the assets and want simplicity and RNRB preservation; discretionary trust is best where you want maximum flexibility (e.g., protecting vulnerable beneficiaries, blended families) and can accept periodic/exit charges and RNRB loss.
Can a parent use a bare trust to reduce inheritance tax for their children?
Yes — a parent can create a bare trust for named children, transferring cash or investments into it. The transfer is a PET (s3A IHTA 1984) — if the parent survives 7 years, the assets are outside the parent's IHT estate permanently with no further IHT charges. The assets grow in the trust and are eventually distributed to the children (at age 18 or later). There are no 10-year periodic charges or exit charges. HOWEVER: if the parent creates the bare trust for their minor child (under 18) and the trust generates income above £100/yr, that income is taxed at the PARENT's marginal rate under ITTOIA 2005, s629 (parental settlement rule). This makes bare trusts holding high-yield assets (e.g., bond funds, high-dividend stocks) less income-tax-efficient for parental gifts to minor children. The parental settlement rule does NOT apply to grandparents — a grandparent-to-grandchild bare trust avoids the s629 issue and is a clean IHT PET. For income-producing assets, consider lower-yield growth investments to minimise the s629 income tax problem.
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