A trust is an obligation that binds a trustee, an individual or a company to deal with the assets such as land, money and shares which form part of the trust. The person who puts assets into a trust is known as a settlor, and the trust is for the benefit of one or more ‘beneficiaries’. The trustees make decisions regarding how the assets in a trust are to be managed, transferred or held back for the future use of the beneficiaries.

IHT planning can involve the careful use of trusts. There are a number of trusts which are subject to different tax rules. The main types are bare trusts, discretionary trusts, interest in possession trusts and mixed trusts.

One of the most widely used, and the name suggests the most basic kinds of trust are bare trust. These trusts are also known as simple trusts or naked trusts. Under a bare trust, each beneficiary has an immediate and absolute title to both capital and income. The beneficiary of basic trust is taxable on the trust income and gains.

HMRC’s guidance states that beneficiaries must include trust income and gains in any tax return they are required to complete or in any form R40. The trustees of a bare trust may pay the tax due to HMRC on behalf of a beneficiary, but the beneficiary is strictly chargeable to tax.

There are critical differences between bare and other types of trust beyond this article’s scope.