Answers · UK 2025/26

Should I set up a bare trust or a discretionary trust for my children?

A bare trust gives the child an absolute, fixed right to the assets, which they can demand outright once they turn 18 -- simpler and generally more tax-efficient for smaller amounts, since the child's own tax allowances apply, but you lose control once they reach adulthood. A discretionary trust lets trustees decide how and when to distribute funds among beneficiaries, offering much more control and flexibility, but with more complex ongoing Inheritance Tax charges and generally less favourable Income Tax treatment.

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Choosing between a bare trust and a discretionary trust for children's money is a common decision for parents and grandparents wanting to save or invest on a child's behalf, and the right choice depends heavily on how much control you want to retain and how much money is involved. **How a bare trust works** In a bare trust, the beneficiary (the child) has an absolute, immediate, and fixed entitlement to both the capital and income of the trust, even though a trustee (often a parent or grandparent) manages the assets on their behalf while they're a minor. Crucially, once the child turns 18 (16 in Scotland), they gain an automatic, unconditional legal right to demand the entire trust fund be handed over to them -- the trustee has no discretion to withhold it, delay the handover, or attach any conditions, regardless of whether the parent thinks the child is ready to manage a potentially large sum responsibly. **How a discretionary trust works for children** A discretionary trust instead gives the trustees ongoing discretion over how and when to distribute income and capital among a defined class of beneficiaries (which could include several children, and often other family members too) -- there's no automatic entitlement at 18, and trustees can choose to delay distributions, provide for education costs gradually, or respond flexibly to each child's individual circumstances and needs as they grow up. **Tax treatment -- bare trusts are usually simpler and cheaper** For a bare trust, income and gains are generally treated as belonging to the child for tax purposes, meaning the child's OWN Personal Allowance, Personal Savings Allowance, Dividend Allowance, and Capital Gains Tax annual exemption can be used against the trust's income and gains -- since children usually have little or no other income, this often means little or no tax is actually payable on modest amounts held in a bare trust. (Note: a specific anti-avoidance rule applies where a PARENT, not a grandparent or other relative, sets up the bare trust and the income exceeds £100 a year -- in that specific case, the income is taxed as the parent's own income instead, removing this tax advantage for parent-funded bare trusts above that threshold.) **Tax treatment -- discretionary trusts face the relevant property regime** A discretionary trust is subject to the more complex relevant property Inheritance Tax regime (periodic ten-year charges and exit charges, both up to 6%), and trust income is generally taxed at the higher trust rates (45% on most income above a small standard rate band) rather than benefiting from each child beneficiary's own personal allowances directly, though tax paid by the trust can sometimes be reclaimed by a beneficiary with unused personal allowances when income is actually distributed to them. **Control -- the key trade-off** The central practical trade-off is control: a bare trust is simpler and usually more tax-efficient, but you permanently lose the ability to control the money once the child turns 18, however immature or financially inexperienced they might be at that point. A discretionary trust retains that flexibility and control for the trustees indefinitely (or until the trust deed specifies otherwise), at the cost of more complex and generally higher ongoing taxation. **Amounts involved often drive the decision** For relatively modest amounts (a Junior ISA-sized sum, for example), the tax advantages of a bare trust structure combined with the lower practical risk of an 18-year-old receiving the money outright often make it the simpler, more popular choice. For larger sums -- for example, a substantial inheritance, a large gift, or a legal settlement (such as a personal injury award) -- many families and their advisers prefer a discretionary trust specifically to retain control well beyond age 18, given the increased risk of a large sum being mismanaged by a young adult. **Junior ISAs as a common bare trust alternative** For many families, a Junior ISA effectively achieves a broadly similar simple bare-trust-style outcome (funds belong absolutely to the child, tax-free growth, with control transferring to the child at 18) without needing a separate formal trust deed at all, making it the default, low-complexity choice for many parents saving modest amounts for their children. **Practical tip** For amounts beyond what you'd be comfortable seeing handed over entirely to an 18-year-old with no conditions attached, take specialist advice on setting up a properly drafted discretionary trust, since the additional complexity and tax cost is often a reasonable price for retaining meaningful control over how and when a child eventually benefits from a larger sum.