What is a bare trust?

Trusts are a well-established means to manage the distribution and ownership of assets, such as property, cash, or shares.

Often, when we think of traditional trusts, we think of a trustee using their discretion to distribute assets among a group of beneficiaries.

Bare trusts are slightly different.

Typically, a bare trust grants the rights of the assets to the beneficiary (or beneficiaries) immediately.

They have full control to access the assets or income from the trust whenever they like.

In the case of shares, the beneficiary can instruct the trustee to sell or transfer them as and when they see fit.

The key difference between bare trusts and traditional trusts

It comes down to the rights, control, and access that the beneficiary has of the assets in the trust.

With a traditional trust, it is up to the trustee how to distribute the assets, dividends, cash, etc., to the beneficiaries.

With a bare trust, the beneficiary has immediate access to the assets, dividends, cash etc. as soon as it is set up. 

Note: in order to exercise their rights to a bare trust, the beneficiary needs to be aged 18 or over in England and Wales, and 16 or over in Scotland, unless otherwise specified in the trust deed.

Who is involved in a bare trust?

• Beneficiary. The beneficiary is the person for whom the bare trust is set up. They have immediate rights to the assets and/or any income as soon as the trust agreement is formalised.

• Trustee. The trustee is the person, sometimes known as a nominee, who manages the bare trust and the assets within it. They act under instruction from the beneficiary.

• Settlor. The person who creates the bare trust.

Bare trusts and UK trust law

Bare trusts are common in UK trust law. They are often used to pass assets, like property or cash, to young people, such as children or grandchildren.

In these cases, the trustees look after the assets until the beneficiary is legally old enough to access them.

For instance, a grandparent might set up a bare trust containing cash for their grandchild. The grandparent is the settlor, as they are creating the bare trust. The grandchild is the beneficiary. And the trustee will be another individual, perhaps a person close to the other parties, such as a parent of the beneficiary.

Bare trusts do exist in other countries too. In the US, for example, they are more often known as simple trusts.

Vestd and bare trust structures

At Vestd, we use bare trust structures to set up Special Purpose Vehicles.

Special Purpose Vehicles (SPVs) are legal entities that are created to better manage money, assets, and/or risks associated with a project or business.  

They could be a syndicate of investors, for example, set up as a limited company.

These are sometimes called Roll-up Vehicles (RUVs), where a group of individuals can invest in a target company as a single entity, minimising the number of names on the cap table and streamlining operations in the process.

How bare trust structures help

Certain tax reliefs, such as Seed Enterprise Investment Schemes and Enterprise Investment Schemes, are not available to Limited Liability Partnerships (LLPs) and Limited Partnerships (LPs)

Bare trust structures help, here. While the nominee holds the shares, they are still controlled by the beneficial owners, i.e. the individual investors. This ensures that the investors will still benefit from the relevant tax reliefs.

Vestd Nominees can even be your named nominee when creating an SPV or RUV. But, as you can expect from a bare trust, we are always obligated to act under the investors’ instruction.

Why use a bare trust?

The real USP of a bare trust is that the beneficiary (if they are of legal age) has the immediate and absolute right to the assets and any income generated from them. 

While the trustee holds the assets for the beneficiary, they have no discretion over how the assets are used or distributed. 

Whether the trust contains property, cash, or shares, it is up to the beneficiary what they do with those assets. The trustee must act under their instruction from as soon as the bare trust is set up and the trust deed is signed.

This is useful for those seeking to pass property to family members, or wanting to gift cash or shares to children because it ensures that the beneficiary has full control of the assets from the outset.

Likewise, in the case of using a bare trust structure for a syndicate of investors in the form of an SPV or RUV, the shareholders – or beneficial owners – retain the rights and control over the shares they own.

The nominee in these cases, whether it is Vestd or another party, legally owns the shares. But the investors still have the rights and control, as well as still having access to the relevant tax reliefs available to individuals.

For more information about how Vestd uses bare trust structures or can help you set up an SPV, get in touch!