Bare trusts and discretionary trusts — structure and tax treatment
Bare trust: trustee holds legal title as nominee; beneficiary has immediate indefeasible right to property and income; HMRC looks through for tax — beneficiary pays income tax at personal marginal rate; CGT at personal rates (24%/18% for residential property from October 2024); personal CGT exemption (£3,000 2024-25). Discretionary trust: trustees hold for class of beneficiaries; discretion over distributions; trust itself is separate taxpayer; income at 45% above £1,000 standard rate band; 8.75% on first £1,000; beneficiaries receive R185 certificate; CGT at 24% (residential property); trust annual CGT exemption £1,500; IHT — relevant property regime: entry charge (CLT; 20% above available NRB); 10-year periodic charge (max 6% effective rate every 10 years); exit charge on distribution.
- Bare trust: nominee/privacy use; family arrangements; HMRC looks through — beneficiary reports rental income on SA100; pays personal CGT on disposal
- Discretionary trust: no fixed beneficiary entitlement; trustees exercise discretion; IHT 10-year periodic charge erodes trust fund at maximum 6% per decade; entry CLT starts 7-year clock
- Annual CGT exemption: trusts (discretionary) £1,500 (2024-25) — significantly below individual £3,000; result of successive allowance reductions since 2022-23
- Scotland: Trusts and Succession (Scotland) Act 2024 (replacing Trusts (Scotland) Act 1921); TRS registration applies to Scottish property-holding trusts
HMRC TRS registration, annual updates, penalties and trustee landlord compliance
HMRC TRS: 5MLD implementation — all express trusts must register from 1 September 2022 at trust-registration.service.gov.uk. Register: trust details; all trustees (name; DOB; NI number; address); all beneficiaries (or class); trust assets including properties; settlor details. Annual updates within 90 days of any change. Penalties: £100 per trust per registration failure; escalating for persistent non-compliance. Bare trust TRS exemption narrow and uncertain — legal advice needed before assuming exemption applies. Trustee compliance as landlord: trustees are 'landlord' under all housing law — gas safety; EICR; EPC; deposit protection (HA 2004 s.213 — protect within 30 days; serve PI); right to rent checks (England); fire and CO alarms; MEES compliance.
- TRS registration: lead trustee registers via trust-registration.service.gov.uk — requires NI numbers for all trustees; HMRC online services account required
- Annual update: within 90 days of change of trustee; beneficiary; asset; or contact details — missed updates trigger penalties
- Trust SA900 tax return: discretionary trusts must file SA900 annually; pay trust income tax and CGT; issue R185 certificates to beneficiaries on income distributions
- Bare trust: TRS position uncertain — statutory exemption for simple nominee arrangements may apply where sole individual beneficiary; but HMRC guidance not conclusive; seek legal advice before treating bare trust as exempt