Bare Trusts for Grandchildren: A Simple Way to Gift and Cut Inheritance Tax
A bare trust is the simplest trust structure available for passing money to grandchildren — legally theirs from day one, but held and managed by you as trustee until they're old enough. Here's how it works and where the Inheritance Tax benefit comes from.
How a Bare Trust Works
Inheritance tax gifting rules guide| Feature | Detail |
|---|---|
| Beneficiary's entitlement | Immediate and unconditional — fixed from the date of the gift |
| Trustee's role | Manages/invests the assets, but has no discretion over who benefits |
| Access age | 18 in England, Wales and Northern Ireland; 16 in Scotland |
| Typical use | Grandparents/parents gifting cash or investments for a grandchild's future |
The Inheritance Tax Mechanism
A gift into a bare trust is a Potentially Exempt Transfer (PET) — identical tax treatment to gifting the same amount directly to an adult:
| Years survived after the gift | IHT treatment |
|---|---|
| 7+ years | Fully outside the donor's estate — no IHT at all |
| 3–7 years | Taper relief reduces the IHT rate on a sliding scale, if IHT becomes due for other reasons |
| Under 3 years | Full 40% IHT rate applies if the gift forms part of a taxable estate on death within this window |
Worked Example: £50,000 Gift Into a Bare Trust
| Scenario | Outcome |
|---|---|
| Grandparent gifts £50,000 into a bare trust for a grandchild, survives 8 years | £50,000 entirely outside the estate — no IHT on this gift |
| Grandparent dies within 3 years of the gift | Full 40% IHT potentially due on the £50,000 if it exceeds remaining nil-rate band, added to the death estate |
| Grandparent dies in year 5 | Taper relief reduces the effective IHT rate on this specific gift, though it still uses up nil-rate band first |
Bare Trust vs Discretionary Trust
| Bare trust | Discretionary trust | |
|---|---|---|
| Control after age 18 | None — beneficiary gets full access | Trustees retain control indefinitely |
| IHT treatment of the gift | PET — outside estate after 7 years | Immediately chargeable transfer, with its own IHT rules and 10-year anniversary charges |
| Tax on income/gains | Generally taxed as the beneficiary's own | Taxed at trust rates, more complex reporting |
| Complexity/cost to set up | Lower | Higher — usually needs professional drafting |
Practical Steps
- Decide whether the loss of control at age 18 is acceptable for the amount you're gifting — for very large sums, a discretionary trust may suit better despite the added complexity and cost.
- For simple cash gifts, look at bare trust/designated accounts offered by investment platforms and banks, which are often straightforward to set up.
- Keep clear records of the gift date and amount, since this evidence matters if the seven-year PET rule is ever tested by HMRC after the donor's death.
- Take legal advice for gifts of property, business assets, or more complex/large arrangements, where the standard account-based bare trust route isn't appropriate.
Frequently asked questions
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