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HMRC internal manual

Stamp Taxes on Shares Manual

Trusts and pension schemes: types of trust

A bare trust or simple trust is one in which each beneficiary has an immediate and absolute title to both capital and income. The beneficiaries of a bare trust have the right to take actual possession of trust property. The beneficiaries of a bare trust should normally return the income and gains on their own personal tax returns and the trustees are not required to make a tax return. The trustees may pay the tax due to HM Revenue & Customs (HMRC) on behalf of a beneficiary, but it is the beneficiary who is strictly chargeable to tax.

A trust is an ‘accumulation and maintenance’ trust where the following basic conditions are present:

  • there is no interest in possession (in other words, it is not a trust where the beneficiary has an immediate and automatic right to the trustee’s income, after expenses)
  • the income must be accumulated unless it is applied for the maintenance, education or benefit of a beneficiary within the next bullet
  • one or more beneficiaries must on or before reaching 25 become

    • entitled to the property or
    • entitled to an interest in possession.

We use the term ‘accumulation/discretionary trust’ to describe any trust where the trustees can accumulate income or pay it at their discretion. This includes

  • trusts to accumulate (see TSEM1566)
  • trusts where the trustees can pay income at discretion (TSEM1565)
  • accumulations and maintenance trusts (see TSEM1567)
  • mixed trusts (see TSEM1569)

Minors or incapacitated persons are prohibited by law from holding property personally and property has to be held on trust for them. In a trust where such a beneficiary has an indefeasibly vested interest in the trust income and capital the trust is a bare trust. It does not matter that because of the beneficiary’s incapacity the trustee has active duties to perform. The income is the beneficiary’s as it arises.

For most UK trusts for minors the provisions of Section 31 Trustee Act 1925 apply during minority. This Act does not apply to trusts administered in Scotland or established under Scots law. Where S31 applies, the Trustees will have discretion over the use of income for the benefit of the minor and must accumulate the balance. Where the beneficiary’s title to income is indefeasible, the income is the beneficiary’s as it arises, and we do not tax the trust as a discretionary trust.

It is up to the trustees to establish whether a trust is bare. If the trustees have access to legal advice they should ask their legal adviser whether the trust funds have ‘indefeasibly vested’ in the beneficiaries. If they have then the trust will be a ‘bare trust’.

A mixed trust is one where there are distinct parts of the trust fund so that the income may be taxable on more than one basis. For example, a trust may be part accumulation/discretionary and part interest in possession, or part settlor - interested and part non-settlor-interested.

Please refer to the Trusts, Settlements and Estates Manual (TSEM) for further information.