Tax Updates – 3rd August

Can you have a Bare Trust when property is mortgaged

The Revenue has released a new  Question We’ve Been Asked (QWBA), addressing a question that arises frequently in family and cross-border lending arrangements: can a bare trust exist under section YB 21 of the Income Tax Act 2007 where the property held in trust is subject to a mortgage?

The short answer

Simply, yes, the QWBA confirms the Revenue’s view that the existence of a mortgage over trust property does not, of itself, prevent a bare trust relationship from existing. Where a genuine bare trust is in place, section YB 21 applies to look through the trustee, and the beneficiary is treated as if they had personally obtained the mortgage and held the property for tax purposes.

Why this matters

Bare trust arrangements are commonly used where a bank requires an additional borrower or guarantor — for example, a parent or friend added to a loan so that the intended owner can meet a lender’s serviceability requirements. The tax question is whether that “nominee” borrower is genuinely a bare trustee (in which case they are ignored for tax purposes) or whether they hold a real ownership interest with independent rights and obligations (in which case ordinary tax rules apply to them).

The key test

The QWBA confirms that the central question remains the trustee’s role, not the presence of borrowing.

A person will be a bare trustee where:

• their duties are limited to mechanical matters — holding, maintaining, protecting and transferring the property as directed; and
• they have no independent power, discretion or responsibility over the property, acting only on the beneficiary’s instructions.

A trustee who exercises independent judgement or discretion — for example, deciding to obtain finance and acquire property without direction from a beneficiary — is not a bare trustee, and section YB 21 will not apply to them.

Personal liability under the mortgage doesn’t change the analysis

Importantly, the Commissioner accepts that a bare trustee can have real, personal obligations under a mortgage — as borrower, guarantor, or joint tenant required by the lender — without losing bare trustee status. Drawing on Weise v Weise (2023) ONSC 5227 and Halliday v Hannah [2024] NZHC 1747, the QWBA notes that lenders often require the nominee to be a named borrower purely because the intended owner cannot qualify for finance alone. Provided the trustee has no independent decision-making power over the property, taking on that borrower role — including making occasional repayments recouped from the beneficiary — will not defeat the bare trust.

The trustee’s right to be indemnified by the beneficiary for any debts and liabilities incurred (section 81(2), Trusts Act 2019) supports this conclusion, and both cases referenced involved express indemnities in favour of the nominee.

Agency will often overlap with the bare trust

The QWBA also deals with agency, noting that a bare trustee will frequently also act as agent — for example, signing loan or mortgage documents at the beneficiary’s direction. An agency relationship does not need to be in writing, although the Commissioner recommends contemporaneous records given the onus of proof sits with the taxpayer.

Evidentiary requirements

No particular wording is required to create a bare trust, but the arrangement must satisfy the three certainties (intention, subject matter, and object). Where the trust relates to land, section 25 of the Property Law Act 2007 requires the arrangement to be in writing and signed by the settlor at the time it is entered into. Given the onus of proof rests with the taxpayer, the Commissioner recommends keeping contemporaneous records even where land is not involved.

Impact on IS 23/02

QB 26/04 partially replaces IS 23/02 (the bright-line 5-year test statement for family and close-relationship transactions). Paragraphs [144]–[145] and part of Example 5 of IS 23/02 are treated as clarified by this QWBA to the extent of any inconsistency. The Commissioner has also withdrawn the position previously taken at [67] of IS 23/02 on undisclosed principals — an agent for an undisclosed principal is now confirmed to fall within section YB 21.

Practical Takeaways

For advisers structuring family lending arrangements, joint-borrower/bare-trustee arrangements, or similar cross-border structures:

• Document the arrangement clearly — a written bare trust deed (mandatory where land is involved) should expressly limit the trustee’s duties to mechanical/administrative matters and confirm they act only on the beneficiary’s instructions.
• Include an indemnity in favour of the trustee for any liabilities incurred, including under the mortgage.
• Avoid conferring discretion on the trustee — any independent decision-making power over the property risks the arrangement being recharacterised as an ordinary trust or outright ownership, taking it outside section YB 21.
• Keep records of instructions given to the trustee/agent, even where not legally required, to discharge the onus of proof if challenged.

This confirms a sensible, practical approach that should provide comfort in the many everyday situations where a bare trust is used to satisfy a lender’s requirements rather than to confer any real ownership interest on the nominee.

The QBWA is only a 9 page read, so not too taxing if you’d like to review its full commentary.