A bare trust (also known as an absolute trust) is one where the beneficiary receives the immediate and absolute title to both the capital (the Trust asset) and the income (funds generated as a result of the trust assets) and the beneficiary has the right to those Trust Assets at any time if they’re 18 or over. In effect, this means the intended beneficiary will always receive the Trust Assets.
Prior to the introduction of the Fifth Money Laundering Directive (5MLD), typically trusts that have a tax liability must be registered with HMRC. Bare trusts are commonly used to gift to children, and so tax liabilities on bare trusts are uncommon. Tax liabilities incurred in these types of trusts are incurred by the beneficiary and not the trustees.
Under 5MLD, the scope of the rules has now been extended so that all express trusts, regardless of their tax liability, need to be registered unless they fall within a limited set of exclusions. Bare trusts constructed within a Will are now required to register if they are not wound up within two years of the testator’s death. An exclusion to this is if the Will trust is a trust for bereaved minors or an 18-25 trust (where a child under the age of either 18 or 25 respectively inherits from a parent).
Child bank accounts which are held as bare trusts also fall under a limited exception under Schedule 3A of the 5MLD and would therefore be excluded from registration. There are further complexities relating to this exception that require consideration, depending on the length of time the trust is in operation.
It is up to the trustees to establish whether a trust is bare and, while HMRC have extended their registration deadline to 1 September 2022, it is important that trustees use this time wisely to ascertain whether trusts they manage fall within these regulations and obtain the necessary information to comply with reporting requirements. It is therefore advisable that trustees seek legal advice to ensure they meet the regulatory deadlines. Speak to Lauren Hockley-Smith, our Trust Manager, to see whether this applies to you.