Discretionary Trust vs Bare Trust: Key Differences Explained

When families begin exploring trusts, one of the first choices they face is between a discretionary trust and a bare trust. These are the two most common structures in UK private client planning, and the difference between them shapes everything — from who controls the assets, to how distributions are made, to the tax treatment during the trust's life and on termination. Getting this choice right from the outset matters.

The Fundamental Distinction

In a bare trust, the beneficial interest is fixed from the moment the trust is created. The beneficiary has an immediate, absolute right to the trust assets — the trustee holds legal title, but the beneficiary can demand the assets be transferred to them as soon as they reach the age of 18. There is no discretion: the trustee must follow the beneficiary's instructions.

In a discretionary trust, no beneficiary has a fixed entitlement. Instead, the trustees decide — in their absolute discretion — who receives income or capital distributions, when, and in what amounts. The beneficiaries have a right to be considered, but no right to receive anything in particular.

How a Discretionary Trust Works

Under a discretionary trust, the trustees hold all the power to distribute income and capital. They typically operate within a class of potential beneficiaries defined in the trust deed — for example, the settlor's children, grandchildren, and their spouses. Within that class, they decide who receives what.

This structure is extremely flexible. Trustees can respond to changing family circumstances: a beneficiary who faces financial difficulty, a divorce, or a period of poor financial management can be passed over in favour of others. A new grandchild can be included if the deed's class definition covers them.

How a Bare Trust Works

A bare trust is much simpler. The trustee holds assets on behalf of a named beneficiary who has an immediate and unconditional right to them. Bare trusts are commonly used for holding assets on behalf of children until they reach 18, for holding shares, or as a simple custodial arrangement.

Because the beneficial interest is fixed, there is very little ongoing trustee discretion to exercise. The trustee's role is administrative rather than judgmental. This makes bare trusts easier to run — but also less protective, since the beneficiary's creditors or a divorcing spouse may be able to reach the assets once the beneficiary becomes entitled.

Tax Treatment: Where They Diverge

The tax treatment of the two structures is significantly different. A bare trust is generally treated as transparent for income tax and capital gains tax purposes — the beneficiary is taxed as if they directly own the assets. This simplifies reporting but means the settlor cannot use the trust to manage the beneficiary's tax position.

A discretionary trust is subject to a separate tax regime. Income retained in a discretionary trust is taxed at the trust rate (currently 45% for income and 39.35% for dividends). Capital gains are taxed at 20% (or 28% for residential property). There is also a ten-yearly periodic charge and an exit charge on distributions of capital.

Frequently Asked Questions

Can a discretionary trust be converted into a bare trust?

Generally not by simple amendment — the two structures have fundamentally different legal characteristics. Winding up a discretionary trust and re-settling assets on bare trust terms is possible but has tax consequences that must be carefully assessed before proceeding.

At what age can a beneficiary demand assets from a bare trust?

In England and Wales, a beneficiary under a bare trust can demand the assets be transferred to them once they reach the age of 18. Until that point, the trustee holds and manages the assets on their behalf.

Do bare trusts need to be registered with HMRC?

Bare trusts may need to be registered on the Trust Registration Service (TRS) depending on their circumstances. Following changes to the registration rules in 2021, most express trusts — including many bare trusts — are required to register. Professional advice should be taken on registration obligations.

Which trust type offers better asset protection?

A properly administered discretionary trust generally offers stronger asset protection than a bare trust. Because no beneficiary has a fixed entitlement, it is harder for creditors or a divorcing spouse to claim the assets. Bare trusts, where the beneficiary has an immediate right to the assets, offer limited protection once the beneficiary reaches 18.