Bare Trust for Children UK (2026): Income Tax, CGT, IHT and How Parental Settlement Rules Work

A bare trust (also called an absolute trust or simple trust) is the simplest type of trust in England and Wales. It has the following essential features: (1) ABSOLUTE ENTITLEMENT FROM THE OUTSET: the beneficiary of a bare trust is absolutely entitled to the trust assets from the moment the trust is created. There is no discretion — the assets belong to the beneficiary, not the trustees. Trustees hold only the legal title (ownership) on behalf of the beneficiary; (2) NO TRUSTEE DISCRETION: unlike a discretionary trust, the trustees of a bare trust have no power to decide how or when assets are paid out — the beneficiary is unconditionally entitled. The trustees merely manage and invest the assets until the beneficiary calls for them; (3) THE BENEFICIARY CAN DEMAND TRANSFER: once the beneficiary reaches age 18 (the age of majority under the Family Law Reform Act 1969), they can demand that the trustees transfer the legal title to them. For land, the right to demand transfer arises at 18 (under the Law of Property Act 1925 s.1 — a minor cannot hold a legal estate in land). For other assets (investments, cash), the demand can in principle arise earlier, but in practice the trust document sets 18 as the administration threshold; (4) COMMONLY USED FOR: (a) gifts to minor children or grandchildren — the parent/grandparent (settlor) makes a gift into a bare trust for the benefit of a named minor; the gift is immediately the child's property but is administered by a trustee until 18; (b) Junior ISA (JISA) accounts — technically held on bare trust terms; (c) designated investment accounts with stockbrokers — the account is held in the broker's name 'designated' to a minor beneficiary; (d) bare trusts are also used in conveyancing and commercial property, but those structures are beyond the scope of this article; (5) CONTRAST WITH A DISCRETIONARY TRUST: a discretionary trust gives the trustees COMPLETE DISCRETION over who receives income and capital from a range of beneficiaries. The beneficiaries have no right to demand payment. Discretionary trusts are also 'relevant property trusts' for IHT — they are subject to periodic 10-year charges (up to 6%) and exit charges. A bare trust is NOT a relevant property trust and has no such charges.

Income tax on bare trust income follows strict rules, with a significant anti-avoidance carve-out where the settlor is a parent: (1) GENERAL RULE — INCOME TAXED ON THE BENEFICIARY: because the beneficiary is absolutely entitled, income from bare trust assets (interest, dividends, rental income) is treated as the beneficiary's own income. If the beneficiary is a minor child: (a) the child uses their personal allowance (£12,570 in 2025/26) against the trust income; (b) this means a child with no other income can receive up to £12,570 of interest/dividends from the bare trust free of income tax; (c) the starting rate band and personal savings allowance may also apply; (2) PARENTAL SETTLEMENT ANTI-AVOIDANCE RULES (ITTOIA 2005 ss.629-632): where a PARENT is the settlor of the bare trust (i.e. the parent put the money into the trust for their own minor child), a special anti-avoidance rule applies. If the income from the trust assets exceeds £100 in a tax year, the ENTIRE income is treated as the parent's income — not the child's. The £100 threshold is per parent, per child, per tax year. This rule exists to prevent parents reducing their higher-rate tax bills by splitting income with their children. KEY DETAILS: (a) the rule applies where the settlor is a parent (natural, adoptive, or step-parent) of the minor beneficiary; (b) it does NOT apply where the settlor is a grandparent, aunt, uncle, or other third party — in those cases the general rule applies and income is taxed as the child's; (c) the rule applies to income received while the child is under 18 and unmarried; (d) if the income is £100 or less, it is still taxed on the child; (3) EFFECT IN PRACTICE: a parent who puts £50,000 into a bare trust for their child and earns 4% interest (£2,000/year) will find that £2,000 is taxed on the parent at the parent's marginal rate. If the parent is a 40% taxpayer: income tax = £800/year — the same as if the parent had simply kept the £50,000 in their own savings account. The bare trust achieves no income tax advantage for parent-to-child gifts; (4) GRANDPARENT EXCEPTION: if a grandparent settles a bare trust for a grandchild, the parental settlement rules do NOT apply. The income is taxed on the grandchild, who can use their personal allowance. This makes grandparent-to-grandchild bare trusts a very effective income tax planning structure for families with higher-rate taxpaying parents and grandparents with spare capital.

Capital gains tax on bare trust assets follows the beneficial ownership principle — because the beneficiary is absolutely entitled, the beneficiary is treated as the owner of the assets for CGT: (1) GAINS BELONG TO THE BENEFICIARY: any capital gain made on the disposal of bare trust assets (sale of shares; realisation of investments) belongs to the beneficiary (the child) — not the trustees. The gain is calculated using the base cost at the date the asset was settled into the trust (the settlor's original acquisition cost if the gift was not at arm's length — hold-over relief may apply); (2) CREATING THE BARE TRUST — THE INITIAL GIFT: when a parent (or grandparent) gifts assets into a bare trust for a minor, this is a disposal by the settlor for CGT purposes. The deemed disposal is at the market value of the assets at the date of the gift. Any gain from the settlor's original cost to the market value at the date of gift is a CGT gain for the settlor. If the gain would otherwise be taxable: hold-over relief (TCGA 1992 s.260) is NOT available for outright gifts to individuals. However: (a) hold-over relief under TCGA 1992 s.165 is available for gifts of business assets — shares in trading companies; farm assets; business property relief assets; (b) where the trust is for a vulnerable beneficiary or disabled person, hold-over may be available under other provisions; (3) MINOR CHILD'S OWN ANNUAL EXEMPT AMOUNT: once assets are in the bare trust, the child has their own annual exempt amount (£3,000 in 2025/26). So if the bare trust sells investments realising a gain of £3,000 or less in a tax year, the child's AEA absorbs the gain — no CGT; (4) PARENTAL SETTLEMENT — CGT TREATMENT: the parental settlement rules in ITTOIA 2005 apply ONLY TO INCOME TAX — they do NOT apply to CGT. CGT on bare trust gains is therefore always assessed on the child (the beneficial owner), regardless of whether the settlor is a parent. This means a parent can settle a bare trust for their child and the CGT is on the child, even though the income is attributed to the parent for income tax; (5) TRANSFER AT 18 — NO CGT EVENT: when the trustees transfer the legal title to the child at age 18 (or later, if later demanded), this is NOT a CGT disposal. The beneficiary takes the assets at the same CGT base cost as the bare trust held them. No gain is realised on the administrative transfer of legal title.

Inheritance tax treatment of bare trusts for children is relatively straightforward compared to discretionary trusts: (1) THE GIFT INTO A BARE TRUST IS A PET: a gift into a bare trust for an individual (including a minor child) is a POTENTIALLY EXEMPT TRANSFER (PET) under IHTA 1984 s.3A. This is because the gift is from an individual to another individual — the bare trust beneficiary is absolutely entitled, so the gift is effectively a direct gift to that person. The PET is: fully IHT-exempt if the settlor survives 7 years; chargeable at up to 40% (with taper relief) if the settlor dies within 7 years; (2) NO RELEVANT PROPERTY CHARGES: a bare trust is NOT a relevant property trust. This means no 10-year periodic charge (up to 6% of the trust fund every 10 years) and no exit charge when assets leave the trust. This is a significant advantage over a discretionary trust, where the relevant property regime applies. A bare trust for a child with £500,000 of assets accumulating over 20 years has no IHT charges during that period (other than the initial PET rules on the gift in); (3) EXEMPTIONS APPLY TO THE GIFT: the usual annual exemption (£3,000/year), small gifts (£250), wedding gifts, and normal expenditure out of income exemptions all apply to gifts into a bare trust — so these can be used to reduce the value of the PET; (4) COMPARISON WITH DISCRETIONARY TRUST: a discretionary trust would be a CHARGEABLE LIFETIME TRANSFER (CLT — taxable at entry above the NRB at 20%) and would also be subject to periodic charges and exit charges. A bare trust is consistently more IHT-efficient; (5) RESERVATION OF BENEFIT RISK: if the settlor retains any benefit from the bare trust assets (e.g. uses income that should belong to the child), the reservation of benefit rules under Finance Act 1986 s.102 could apply — causing the assets to remain in the settlor's estate. In practice this risk is avoided by ensuring the child's designated account is not accessible to the parent.

The practical administration of a bare trust for a minor involves trustee duties, investment powers, and the inevitable transition when the child reaches 18: (1) TRUSTEE INVESTMENT POWERS — TRUSTEE ACT 2000: even though the beneficiary is absolutely entitled, the trustees of a bare trust remain subject to the Trustee Act 2000 while administering the assets. They must: (a) exercise the general power of investment (TA 2000 s.3 — invest in anything a prudent investor would consider) — but they must take advice where appropriate and have regard to the standard investment criteria (suitability and diversification; TA 2000 ss.4-5); (b) review investments periodically; (c) obtain proper advice unless the trustees reasonably conclude it is unnecessary (TA 2000 s.5); (2) TYPES OF BARE TRUSTS IN PRACTICE: (a) DESIGNATED ACCOUNTS: a stockbroker or investment platform may allow an adult to hold assets in an account 'designated' to a minor — often shown as 'A Smith re: J Smith'. This is a bare trust but may not have a formal trust deed; (b) FORMAL BARE TRUST DEED: a short written trust deed naming the trustees, the beneficiary, and the trust property. More common for larger gifts; provides clear evidence of beneficial ownership for HMRC; (c) JUNIOR ISA TRUST: all JISAs are held on bare trust terms — the child is the beneficial owner from birth; cannot be accessed by parents; automatically becomes the child's own account (adult ISA) at 18; (3) WHAT HAPPENS AT 18: (a) once the child reaches 18, they can demand transfer of all trust assets at any time — the trustees cannot refuse; (b) this is a key risk of the bare trust: unlike a discretionary trust where the trustees retain control of distribution, a bare trust gives the adult child complete control. If the parent was hoping to restrict access beyond 18 (e.g. to age 21 or 25), a bare trust is the wrong vehicle — use an 18–25 trust or a discretionary trust instead; (c) if the child becomes absolutely entitled at 18 but does not immediately demand transfer, the trustees continue to hold as bare trustees — but they act entirely on the beneficiary's instructions; (4) HMRC REGISTRATION: most bare trusts do not need to register on the Trust Registration Service (TRS) if they qualify for one of the exemptions. From September 2022, all non-excluded express trusts must register. Bare trusts holding only cash in a bank account designated to a child may fall within an exemption — take advice to confirm registration obligations.