What Is a Bare Trust?
A bare trust (or nominee arrangement) is a trust where the trustee holds legal title but has no discretion — the beneficial owner has an absolute right to both capital and income and can call for the legal title to be transferred at any time (Saunders v Vautier (1841)). The beneficial owner is entirely transparent for tax purposes — HMRC looks through the nominee and taxes the beneficial owner as if they held the property directly. Common uses: nominee companies; family property structures; joint ownership with unequal beneficial interests. A formal Declaration of Trust is not legally required but is strongly recommended to evidence the beneficial interests and support SDLT, CGT, and income tax compliance.
SDLT and CGT on Bare Trust Property
SDLT (FA 2003 s.71A(2)): the beneficial owner is treated as the purchaser — not the nominee; the 3% residential surcharge is calculated on the beneficial owner's total portfolio, not the nominee's; cannot avoid surcharge by using a nominee company. Transfer out (collapsing the trust): generally SDLT-exempt where no consideration changes hands — but mortgage assumption is chargeable consideration. CGT (TCGA 1992 s.60): acts of the bare trustee are treated as acts of the beneficial owner; the beneficial owner is taxed on any disposal at their marginal rate (18%/24% for residential property); transfer from individual to nominee is generally not a CGT disposal (no change in beneficial ownership) — but must be documented. The beneficial owner (not the nominee) is responsible for the 60-day CGT report within 60 days of completion. PRR is based on the beneficial owner's occupation.
Income Tax, IHT, and Practical Points
Income tax: rental income is the beneficial owner's income — declare on self-assessment; nominee is merely an agent; all allowable expenses deductible. IHT: bare trust property is in the beneficial owner's estate — no separate relevant property regime charges; property passes under the beneficial owner's will on death. Parental settlement rules: where a parent places property in bare trust for a minor child, the income and gains are taxed as the parent's (ITTOIA 2005 s.629) until the child turns 18. Practical protection: always execute a Declaration of Trust specifying the beneficial interests; document the SDLT, CGT, and income tax position at the outset; HMRC has challenged nominee arrangements that were not properly documented — maintain contemporaneous evidence of the genuine beneficial ownership structure.