Comparison · Inheritance Tax & Trusts · 2026
Bare Trust vs Discretionary Trust UK 2026: Which Is Better for Children's Savings?
Parents and grandparents putting money aside for children often choose between a simple bare trust and a more flexible discretionary trust. The choice changes who is taxed, how much control you keep, and how exposed the money is if the child’s circumstances change. This guide compares both for 2026.
TL;DR -- 30-Second Summary
- • Bare trust: child gets everything at 18, taxed as the child's own income/gains, simple IHT (PET)
- • Discretionary trust: trustees keep control, but entry charge up to 20% and 10-year periodic charges apply
- • Parental settlement rule taxes a parent (not the child) on over £100/year of income from their own gift
- • Trust CGT annual exemption is £1,500 (2026/27), half the individual £3,000 allowance
- • Discretionary trust income tax is 45%/39.35% on most income since the £1,000 standard rate band was scrapped in 2024/25
Side-by-Side Comparison
| Feature | Bare trust | Discretionary trust |
|---|---|---|
| Entry IHT charge | None — treated as a PET | Up to 20% above £325,000 (CLT) |
| 10-year periodic charge | Not applicable | Up to 6% above the nil-rate band |
| Beneficiary's rights | Absolute — gets assets at 18 | None — trustees decide |
| Income tax | Beneficiary's own rates and allowance | Trust rates: up to 45% / 39.35% dividends |
| CGT annual exemption | £3,000 (beneficiary's own) | £1,500 (trust rate) |
| Asset protection | Weak — beneficiary owns it outright at 18 | Strong — no automatic entitlement |
| Set-up complexity | Low — can use a designated account | Higher — formal deed and TRS registration |
Worked Example: A £50,000 Gift for a Grandchild
A grandparent with no other lifetime gifts in the previous 7 years puts £50,000 aside for a grandchild. £50,000 is well within the £325,000 nil-rate band either way, so there is no immediate IHT charge under either structure — the choice here is really about control and ongoing tax treatment rather than an entry charge.
| Measure | Bare trust | Discretionary trust |
|---|---|---|
| Immediate IHT charge | £0 (PET) | £0 (within nil-rate band) |
| Falls out of estate | After 7 years | After 7 years |
| Who controls timing of payout | Nobody — child gets it at 18 | Trustees, indefinitely |
| 10-year charge at £50,000 growth to £80,000 | Not applicable | £0 — well under nil-rate band, but must still be reported |
For gifts well under the £325,000 nil-rate band, the discretionary trust's periodic and exit charges are usually nil in cash terms because the trust value stays below the band — but reporting obligations and trust administration still apply. The real trade-off at this size is not tax but control: a bare trust guarantees the child receives the money at 18 regardless of maturity, while a discretionary trust lets trustees delay or phase payments.
When a Bare Trust Wins
A bare trust is simpler, cheaper to run and usually more tax-efficient for modest gifts, because income and gains use the child's own unused allowances rather than compressed trust rates. It suits parents and grandparents who are comfortable handing control to the child outright at 18, and who are gifting amounts where the parental settlement anti-avoidance rule is unlikely to bite (or where the gift comes from a grandparent or other non-parent, which the £100 rule does not catch).
When a Discretionary Trust Wins
A discretionary trust wins where control matters more than simplicity: larger sums where you do not want an 18-year-old to receive a lump sum outright, provision for several children or grandchildren with unequal future needs, protection against a beneficiary's future divorce or creditors, or flexibility to skip a beneficiary who is already financially secure. The extra IHT complexity and trust administration cost is the price of that flexibility.