Bare Trusts for Children: How They Work, Their Tax Treatment, and When They Are (and Aren't) Appropriate

Introduction

If you're a UK parent or grandparent thinking about setting aside money for a child's future, you've likely encountered the term "bare trust." Often mentioned alongside Junior ISAs and discretionary trusts, a bare trust sounds simple—and in some ways, it is. But the simplicity masks a critical challenge that catches many families off guard: at age 18, your child gains an absolute legal right to demand all the money in the trust, whether or not you believe they're ready to receive it.

A bare trust is a legal arrangement where a trustee holds assets in their name, but a beneficiary has an immediate and absolute entitlement to both the income and capital. This "bare" nature—meaning the beneficiary's entitlement is unconditional—is what distinguishes it from more flexible structures like discretionary trusts. Understanding bare trusts requires grasping how they interact with three UK tax regimes (income tax, capital gains tax, and inheritance tax), navigating the parental settlement rules that can unexpectedly trigger tax bills for parents, and being honest about whether handing everything to an 18-year-old aligns with your family's wishes.

This article explains how bare trusts work, their tax implications, when they make sense, and when a different structure—such as a discretionary trust or Junior ISA—might serve your family better.

---

How a Bare Trust Works

Legal Structure

A bare trust is created when an adult (the settlor) transfers assets to another adult (the trustee) to hold on behalf of a child or young adult (the beneficiary). The key legal principle is this: the beneficiary has an absolute entitlement to the trust assets and income at any moment, provided they are 18 years old or older (16 or over in Scotland) [1].

Legally, the trustee holds legal title to the assets. In practice, however, the trustee's role is largely administrative. The beneficiary is treated for tax and legal purposes as owning the assets outright—they are the beneficial owner.

A bare trust can be created with or without a formal deed. Many families set up bare trusts informally, naming an adult (often a grandparent or parent) as a nominee trustee, sometimes without written documentation. HMRC does not require bare trusts to be formally registered for tax purposes, because the tax liability falls on the beneficiary rather than the trustee [1].

The "Bare" Nature of Entitlement

The defining feature of a bare trust is that the beneficiary's entitlement cannot be conditional or discretionary. Unlike a discretionary trust, where trustees retain power to decide whether to distribute income or capital, a bare trust gives the beneficiary an immediate and unconditional right. If they ask for the money, the trustee must hand it over.

This has profound practical consequences. A parent or grandparent who establishes a bare trust for a child cannot:

• Delay distribution until the child is 21, 25, or 30
• Withhold money if the child is spending recklessly
• Distribute selectively based on need or behaviour
• Accumulate income within the trust to reduce income tax liabilities

Once the beneficiary turns 18 (or 16 in Scotland), they can demand everything.

What Happens at Age 18

At 18, the child gains legal capacity to enforce their absolute entitlement. The trustee has a legal obligation to transfer the assets to them. This transition marks the end of parental influence over the money.

---

Tax Treatment of Bare Trusts

Tax is where bare trusts become complex. Three separate regimes apply: income tax, capital gains tax, and inheritance tax. Understanding all three is essential to evaluating whether a bare trust suits your circumstances.

Income Tax: The Parental Settlements Trap

This is the area where families most often encounter unwelcome surprises.

The Rule

Income arising from assets settled by a parent on a minor child is taxed as the parent's income, not the child's [2]. This applies to assets gifted by a parent into a bare trust (or any other form of trust) for their unmarried, minor child.

The practical effect: if you gift £50,000 to a bare trust for your daughter, and that money generates £2,000 in interest or dividends in a tax year, you (the parent) must pay income tax on the £2,000 at your marginal rate—not your daughter.

The £100 Threshold

There is a narrow exemption. If the total settlement income from all trusts funded by one parent in a tax year does not exceed £100, the legislation does not apply [2]. Income below £100 per year is taxed as the child's income, using their personal allowance.

Once income exceeds £100, the entire amount reverts to being taxed as the parent's income.

Worked Example:

• You settle £20,000 in a bare trust for your 10-year-old son.
• The money is held in a savings account earning 5% gross interest.
• Year 1 interest: £1,000. This exceeds the £100 threshold.
• You must report the full £1,000 on your Self Assessment tax return and pay tax at your marginal rate.
• If you are a 40% taxpayer, the tax due is £400.
• Your son's tax return shows nil interest (because the legislation attributes it to you).

Grandparent Gifting: Different Rules

This rule applies only to gifts from a parent. If a grandparent, aunt, or other relative settles money into a bare trust for a child, the parental settlements rules do not apply. The income is taxed as the child's income, using their own personal allowance [2].

This is significant: a grandparent can use a bare trust and benefit from the child's unused personal allowance (£12,570 in 2026–27). A parent cannot.

Capital Gains Tax

When the trustee sells or transfers an asset held in the bare trust, capital gains tax may arise. The CGT treatment of bare trusts is more favourable than discretionary trusts.

The Position

Because the beneficiary of a bare trust has absolute entitlement, they are treated as owning the asset for CGT purposes. When an asset is sold, the capital gain is attributed to the beneficiary, not the trustee [3].

The beneficiary can use their own annual exempt amount (AEA). For the 2026–27 tax year, the standard AEA is £3,000. This means the first £3,000 of gains accruing in the beneficiary's bare trust fall outside CGT.

If gains exceed the AEA, tax is charged at the beneficiary's marginal rate. For most children with minimal other income, this will be 20% (the basic rate).

Transfer In

There is no CGT consequence when assets are initially transferred into a bare trust. The trustee is treated as taking the assets at the settlor's original acquisition cost (no "uplift" to market value).

Contrast with Discretionary Trusts

In a discretionary trust, the trustee is the "person" liable to CGT, and the trust has its own AEA of only £1,500 (half the standard amount). The gains are charged at the basic rate of 20% on the trustee. Bare trusts are therefore more CGT-efficient for accumulating gains during childhood.

Inheritance Tax

When you settle assets into a bare trust for a child, you are making a gift. The IHT treatment depends on whether you survive seven years.

Potentially Exempt Transfer (PET)

A gift into a bare trust is a Potentially Exempt Transfer (PET). This means:

• No IHT is due at the time of the gift.
• If you survive for seven years after the gift, it falls out of your estate for IHT purposes entirely, and no tax is ever due [4].
• If you die within seven years, the gift is brought back into your estate, and IHT is charged on its value at the date of death. The tax is calculated using taper relief (reduced rates apply the longer you survived after the gift).

No Ongoing Charges

Unlike discretionary trusts, bare trusts have no periodic charge to inheritance tax. The "ten-year anniversary" anniversary charges that apply to discretionary trusts do not arise in bare trusts.

Example

You gift £100,000 to a bare trust for your 12-year-old grandchild in April 2026. You die in April 2033 (seven years later). Your gift is a PET that becomes completely exempt. No IHT is paid, and the £100,000 forms part of your grandchild's absolute inheritance at age 18.

If you had died in April 2032 (six years later), the gift would be chargeable. IHT is calculated on the £100,000 using the then-current rate, with taper relief reducing the charge by 60% (because six years have passed).

---

The Age-18 Issue: Why Families Choose Discretionary Trusts Instead

The defining problem with bare trusts is the age-18 cliff edge.

At 18, your child can walk into their trustee's office and demand every penny. There is no mechanism within a bare trust to say, "I'd prefer they receive this in instalments," or "They're not mature enough yet," or "Let's wait until they're 21."

For many families, this is intolerable. Parents and grandparents often prefer their children to receive money gradually or only when they've demonstrated financial responsibility. A bare trust offers no flexibility here.

Example Scenario

You set up a bare trust for your son at age 10, contributing £50,000. At 18, he leaves school, wants to take a gap year, and demands the entire amount for travel and living expenses. He is legally entitled to it. You cannot prevent the withdrawal.

For a discretionary trust, by contrast, the trustee—often a parent or professional—has discretion to withhold distribution or distribute selectively. The 18-year-old has no absolute right.

This difference is the primary reason many families choose discretionary trusts despite the higher administration costs and less favourable tax treatment. The trade-off is explicit control.

---

Bare Trusts vs. Discretionary Trusts vs. Junior ISAs

Aspect	Bare Trust	Discretionary Trust	Junior ISA
At age 18, does beneficiary have absolute right to money?	Yes, full right	No, trustee has discretion	Yes, becomes adult ISA
Income tax: parent funding (per annum)	Parent taxed on all income above £100	Complex; trustee taxed at 20% + trust surcharge	Tax-free up to £9,000 contribution
Grandparent funding: income tax	Child taxed on income (uses child's PA)	Trustee taxed at 20% + surcharge	Tax-free up to £9,000 contribution
Capital gains tax	Beneficiary uses own AEA (£3,000)	Trust AEA only £1,500	No CGT on growth
Inheritance tax on gift	PET (exempt if survive 7 years)	Chargeable lifetime transfer (20% tax now)	Exempt gift (no IHT)
10-year anniversary charge	No	Yes, 6% every 10 years	N/A
Annual contribution limit	None	None	£9,000 per child per year [5]
Flexibility: Can delay distribution past 18?	No	Yes	No
Suitable for grandparent gifts?	Excellent (income taxed to child)	Less efficient (trust rate applies)	Good for smaller, regular gifts
Suitable for large parental gifts?	Poor (parental settlement rules trap)	Better (though complex)	Limited to £9,000 annually

Key Comparisons

Bare Trust vs. Discretionary Trust for a Parent Funding £100,000:

A parent funding a bare trust with £100,000 faces the parental settlement trap. If the trust generates £4,000 annual income (e.g., interest), the parent pays tax on £4,000 at their marginal rate (potentially 40% = £1,600 tax per year).

A discretionary trust funded by a parent incurs an immediate IHT charge of 20% on amounts above the nil-rate band (currently £325,000), so no IHT due on £100,000. However, the trustee faces an ongoing 20% income tax charge on trust income plus the 6% surcharge, and periodic IHT charges every 10 years.

For a parent with significant surplus income, a bare trust may be workable if the trust is structured to hold capital only (not income-producing assets). For income-producing assets, the discretionary trust or a parental gifting plan (using the parent's own allowances) is usually better.

Bare Trust vs. Junior ISA for a Grandparent Gifting £50,000:

A grandparent can establish a bare trust with £50,000 and avoid the parental settlement trap entirely. All income is taxed as the grandchild's income, benefiting from the child's personal allowance. This is tax-efficient.

However, a Junior ISA is capped at £9,000 per child per year. The grandparent could contribute £9,000 per year for five years (cumulatively £45,000) into the Junior ISA, with all growth and income tax-free. At age 18, the Junior ISA becomes an adult ISA, with no forced distribution—the young adult can retain the money within the ISA wrapper indefinitely.

For a one-off large gift, a bare trust is more flexible (no annual cap). For regular, smaller contributions, a Junior ISA is more tax-efficient.

---

When a Bare Trust Is Appropriate

Despite its limitations, a bare trust serves several important purposes:

1. Small Amounts and Overflow Gifting

If you're gifting a relatively small sum—say, £5,000 to £10,000—to a grandchild, a bare trust is simple and cost-effective. There is no deed required, no formal registration, and minimal administration. If the amount is small enough that it generates under £100 annual income, the parental settlement trap does not apply. For grandparent gifts, this is often the most practical option.

2. Grandparent Gifts with Income-Producing Assets

A grandparent can gift a capital-producing asset (e.g., a rental property, dividend-paying shares, or a savings account) into a bare trust, and all income benefits from the child's personal allowance and lower-rate treatment. This is much more efficient than the parent doing the same.

Example: A grandparent gifts £50,000 in dividend-paying shares to a bare trust for a 12-year-old grandchild. The shares generate £2,000 annual dividends. The child's tax return includes the £2,000 dividend, uses their personal allowance, and the dividend is likely subject only to the basic rate (or nil rate if within the dividend allowance). The grandparent is not caught by the parental settlement rules.

3. Court-Ordered Compensation or Award Trusts

When a child receives a damages award or inheritance from a court, a bare trust is commonly used to hold the funds until the child reaches majority. This is straightforward and aligns with the temporary nature of the arrangement.

4. Holding Assets Until the Beneficiary's 18th Birthday (When Control Is Not Needed)

If you are comfortable with your child receiving the funds at 18, a bare trust requires minimal administration and offers reasonable tax efficiency (especially for grandparent gifts). Some families are content to gift unconditionally at 18 and see a bare trust as a simple vehicle to hold assets in trust until that date.

---

When a Bare Trust Is Not Appropriate

1. Large Parental Gifts with Income-Producing Assets

If a parent is gifting a substantial sum into a bare trust and expects it to generate income, the parental settlement trap makes this inefficient. For a parent funding a bare trust with £100,000 generating 5% interest (£5,000 p.a.), the parent's tax liability could be £2,000 per year (at 40% marginal rate). A discretionary trust or alternative gifting strategy is likely better.

2. Concern About the Child's Readiness to Receive Money at 18

If you want to influence when and how a child receives funds—for example, if you'd like to delay distribution, distribute in stages, or make distributions conditional on behaviour or milestones—a bare trust is unsuitable. A discretionary trust (with a written letter of wishes to guide the trustee) offers this flexibility.

3. Assets That Might Appreciate Substantially

If you're settling assets you expect to appreciate significantly (e.g., shares in a private company, a property expected to rise in value), a bare trust can lead to large CGT liabilities within the beneficiary's name at age 18. The child might face a sudden tax bill on gains that accrued over years. A discretionary trust or other structure offering more control is preferable.

4. Multiple Beneficiaries or Changing Circumstances

If you want to benefit several children or grandchildren from a single fund and retain flexibility as to who receives what and when, a bare trust is inefficient (you'd need one bare trust per beneficiary). A discretionary trust with multiple beneficiaries offers flexibility.

---

The Parental Settlement Trap in Detail

The parental settlement trap deserves careful examination because it catches many well-intentioned parents.

The Law

Under ITTOIA 2005 (Income Tax (Trading and Other Income) Act 2005), if an unmarried minor child of a settlor receives income from a settlement made by that settlor, the income is treated as the settlor's income for tax purposes, not the child's [2]. This rule applies regardless of whether the settlement is a bare trust, discretionary trust, or any other form.

The rule is intended to prevent parents from using trusts to shift income-tax liability to children, who typically have unused personal allowances.

The £100 Exception

The legislation includes a narrow exemption: if the total income arising in a tax year from all settlements made by one parent does not exceed £100, the rule does not apply [2]. This means:

• If you set up a bare trust with £50,000 in a cash savings account earning 1% gross interest (£500), the income exceeds £100, and you are taxed on the full £500.
• If you set up a bare trust with £5,000 earning £75 interest, the income is under £100, and the rule does not apply; your child's tax return includes the £75.

Example: The Parental Settlement Trap in Action

Scenario:

• In April 2024, you gift £80,000 to a bare trust for your 10-year-old daughter.
• You nominate your sister as the trustee.
• The money is placed in a savings account earning 4% gross interest.
• You do not inform HMRC of the trust or the gift; you assume the income will be your daughter's.

Tax Year 2024–25:

• Interest earned: £3,200.
• This far exceeds the £100 threshold.
• Your tax return: You must declare the £3,200 as settlement income.
• Tax due: At 40% (higher rate), you owe £1,280 tax on income you did not personally receive.
• Your daughter's tax return: She reports nil interest income.
• Your daughter's tax position: She is entitled to use her personal allowance against other income, but she cannot use it to shelter the settlement interest.

Why This Happens

Many parents are unaware of the rule. They believe that placing money in a child's name (or in trust for a child) automatically means the child pays tax on the income. In fact, the parental settlement rule reverses this intuition for parent-funded settlements.

How to Avoid It

Option 1: Use a Discretionary Trust A discretionary trust avoids the parental settlement rule's attribution. The trustee is taxed on income at 20% (plus the 6% surcharge if accumulated). This is often better than the parent paying tax at 40%, but the trust must file its own tax return.

Option 2: Avoid Income-Producing Assets If a parent-funded bare trust holds only growth assets (e.g., shares expected to appreciate but not generate dividends, or a unit trust growth fund), no income arises, and the rule is irrelevant.

Option 3: Gift from a Grandparent Instead If possible, have the grandparent make the gift into the bare trust. The parental settlement rule does not apply. Income is taxed as the child's income.

Option 4: Gifting Strategy Without a Trust A parent can gift money directly to a child (not in trust). The child is taxed on any income. However, the child's assets are not protected if the child faces insolvency or a claim. For large gifts, trusts offer asset protection that direct ownership does not.

---

Setting Up a Bare Trust: Practical Mechanics

Is a Deed Required?

No formal deed is legally required to establish a bare trust. Many bare trusts are informal arrangements, consisting of:

• One adult (the settlor) transferring assets to another adult (the trustee) by deed of gift or bank transfer.
• A simple agreement (sometimes just a letter) stating the beneficiary's name and that the assets are held on bare trust terms.
• No registration with HMRC.

However, a formal deed is helpful because it:

• Clarifies the settlor's intent in writing.
• Provides evidence for the trustee's executor or heirs if the trustee dies.
• Helps the child understand their entitlement when they turn 18.
• Simplifies any later dispute about whether the arrangement was intended to be a trust.

Transferring Assets

Assets are transferred to the trustee's name. For bank accounts and savings, this usually means opening an account in the trustee's name and stating it is held "in trust for [beneficiary's name]." For property, a deed of gift is required, and the property is registered at HM Land Registry in the trustee's name.

The Role of the Nominee Trustee

Often, a parent or grandparent nominates a sibling, spouse, or trusted friend as the trustee. The nominee holds legal title but has no discretion; they must hold the assets for the beneficiary's absolute benefit and hand them over on demand once the beneficiary is 18.

No Annual Tax Return Requirement for the Trustee

Because a bare trust is not registered and the tax liability falls on the beneficiary, the trustee usually does not file a separate tax return. The beneficiary includes any income or gains on their own Self Assessment tax return (if they have one). If the beneficiary is a child earning minimal income, no tax return may be required at all (unless income exceeds £12,570).

---

Frequently Asked Questions

Q1: Can I change my mind and take the money back before my child turns 18?

No. Once you've transferred assets into a bare trust, you have no legal claim to them. The beneficiary owns them absolutely (in equity). If you later regret the gift, you cannot reclaim the assets. This is different from a discretionary trust, where the settlor (if also a beneficiary) might retain some involvement.

If you might want to retain control, use a discretionary trust instead.

Q2: My child is 16 and I set up a bare trust when she was 10. Can I prevent her from accessing the money now?

In England and Wales, a beneficiary of a bare trust can demand assets at age 18. In Scotland, the age is 16. Once your child has turned 18, if they ask for the money, the trustee must hand it over. You cannot prevent this by adding conditions retroactively.

However, if your child is 16 and you believe they lack capacity to make financial decisions, you might seek a court order (though this is a high bar). Ordinarily, a child aged 16–18 can be advised not to withdraw funds, but cannot be legally prevented from doing so.

Q3: Is a bare trust suitable if I expect the child might face a legal claim (e.g., from a creditor or liability)?

Yes, in some respects. A bare trust offers the child limited asset protection because the assets are held in the trustee's name (not the child's name). If the child is sued, the claimant must pursue a claim against the trustee or show that the beneficiary's entitlement is attachable. However, once the beneficiary turns 18 and the assets are transferred to them personally, this protection is lost.

A discretionary trust offers much stronger protection because the beneficiary has no absolute entitlement and cannot be forced to hand over assets.

Q4: What happens if the trustee dies before my child turns 18?

The trustee's executor or administrator becomes responsible for the trust assets and distributes them to the beneficiary when the beneficiary turns 18. To ensure continuity, a written bare trust deed should name a successor trustee or specify how a replacement trustee is appointed. Without this, the executor must make arrangements.

Q5: Can I set up a bare trust for twins or multiple children from a single fund?

No. A bare trust must name a single beneficiary. Each beneficiary requires a separate trust (and usually a separate asset transfer). If you want to benefit multiple children from a single fund, a discretionary trust is more practical.

Q6: Is a bare trust the same as a "children's trust"?

"Children's trust" is not a legal term; it is colloquial. It may refer to a bare trust, a discretionary trust, or an accumulation and maintenance trust. Always clarify with a professional which type of trust is intended.

Q7: Do I need insurance on the trustee?

If the trustee is elderly or in poor health, they may become unable to manage the trust. Consider naming a replacement trustee or ensuring the successor trustee (e.g., an adult child of the original trustee) is prepared to take over. You might also consider trustee insurance, though this is less common for bare trusts than for larger or more complex trusts.

---

Disclaimer

This article is for informational purposes only and does not constitute legal advice, tax advice, or financial advice. The laws and tax thresholds referred to reflect the position as of 28 April 2026. These may change. Family gifting and trust structures involve significant legal and tax implications that vary depending on individual circumstances.

Before establishing a trust, you should:

1. Consult a qualified solicitor or tax adviser.
2. Obtain personalised advice based on your specific financial position, family structure, and long-term goals.
3. Ensure that any trust deed includes clear terms and successor trustee provisions.

The author and publisher accept no liability for any loss or damage arising from reliance on the information in this article.