Bare Trusts and Inheritance Tax UK 2026: IHT Transparency, No Relevant Property Charges, Grandchildren Education Planning, and Bare Trust vs Discretionary Trust
A bare trust is transparent for IHT — the assets belong to the beneficiary, not the settlor. No 10-year periodic charges; no exit charges. The gift is a PET. For grandparent education planning, a bare trust is simpler and more tax-efficient than a discretionary trust in almost every case.
Bare Trust = PET + No Ongoing IHT Charges (Unlike a Discretionary Trust)
Gift into a bare trust: PET (s3A IHTA 1984) — outside the estate after 7yr; no 20% entry charge. No 10-yr periodic charge (s64 IHTA). No exit charge (s65 IHTA). Assets treated as belonging to the beneficiary — not relevant property. For grandparents funding grandchildren's education: bare trust first; JISA first for amounts within the £9,000/yr JISA limit; bare trust for excess amounts or non-JISA assets. Grandparent-funded: no parental settlement income tax rule (only applies to parent-funded trusts).
| Aspect | Bare Trust | Discretionary Trust | Planning Guidance |
|---|---|---|---|
| IHT treatment of assets in a bare trust — transparency | A bare trust is TRANSPARENT for IHT: the beneficial assets are treated as owned by the BENEFICIARY (not the trustees; not the settlor). The trust assets are in the BENEFICIARY's estate for IHT — NOT the settlor's. Once the gift into the bare trust has been made and the PET (s3A IHTA) clock is running, the assets are outside the settlor's estate (subject to the 7yr survival requirement). After 7yr: the assets are fully outside the settlor's estate with no IHT liability on the original gift. If the settlor dies within 7yr: the PET becomes chargeable — the original gift value (not the current trust value) is added back into the cumulative transfers for IHT calculation. | A discretionary trust is 'relevant property' (s58 IHTA 1984): the trust assets are subject to the relevant property trust charges regardless of who the beneficiaries are (as long as none has a qualifying interest in possession): 10-yr periodic charge (s64 IHTA — up to 6% of the trust value on each 10-yr anniversary); exit charge (s65 IHTA — charged when assets leave the trust). The gift into a discretionary trust is a CLT (Chargeable Lifetime Transfer) — 20% entry charge on the excess above the NRB. The trust assets are NOT in the settlor's estate for IHT (unless GWR applies) but are subject to the ongoing relevant property charges indefinitely. | For grandparent-to-grandchild education funding: a bare trust is more IHT-efficient than a discretionary trust. Gift is a PET (7yr clock; not a CLT); no 10-yr charges; no exit charges. The simplicity and tax efficiency of a bare trust make it the preferred vehicle for straightforward education or gift planning where the settlor is comfortable identifying a specific beneficiary absolutely. |
| Creating a bare trust — who is the beneficiary and when can they demand assets? | The beneficiary of a bare trust must be ASCERTAINED (identified — not a class such as 'my grandchildren'). The beneficiary has an absolute beneficial entitlement from the date of the gift. For a minor (under 18 in England): the trustee holds the assets until the beneficiary reaches 18; at 18, the beneficiary becomes entitled to demand transfer of the assets and income. The trustee CANNOT change the beneficiary or withhold the assets once the beneficiary reaches 18. For a person over 18 with capacity: the beneficiary can demand the assets at any time (Saunders v Vautier principle — the beneficiary can collapse the trust). For a beneficiary under 18: the trustee can invest the assets and accumulate income (or distribute income) at their discretion until the beneficiary turns 18. | A discretionary trust has a 'class' of potential beneficiaries — the trustee decides who receives the assets and when. The beneficiaries have no absolute entitlement — they have a 'hope' of receiving benefits. The trustee can exclude or include beneficiaries at will (within the trust deed). This gives the settlor (and trustees) much more control over who receives the assets and when — useful if the settlor is not sure which grandchildren are most deserving or if they want to retain control until a later decision. Downside: CLT entry charge + 10-yr charges + exit charges. | Bare trust: simpler but less flexible. Once set up, the beneficiary is locked in — the trustee cannot change who benefits. If the grandchild dies before 18: the assets form part of the grandchild's estate (even though they could not demand them). Discretionary trust: more flexible; more expensive (IHT charges). For education planning where the grandchild is identified and healthy: bare trust is preferred. For large family estates where flexibility is needed across multiple grandchildren: discretionary trust (or family pilot trust arrangements) may be more appropriate despite the IHT costs. |
| Income tax in a bare trust — parental settlement rules | For a bare trust funded by a GRANDPARENT (or other non-parent): the parental settlement income tax rules (ITTOIA 2005 s629) do NOT apply. The income from the bare trust is taxed on the BENEFICIARY (the grandchild). If the grandchild has no other income (or is below the personal allowance): the first £12,570 pa of income is tax-free. For investments held in a bare trust for a grandchild: dividends, interest, and other income are the grandchild's income — taxed at their marginal rate (often 0% if the grandchild has no other income). GREAT TAX EFFICIENCY for grandparent-funded bare trusts: the grandchild's personal allowance shields income; capital gains use the grandchild's CGT annual exempt amount. | For a bare trust funded by a PARENT (parental settlement): if the income from the trust exceeds £100 in a tax year: the PARENT is taxed on that income as if it were their own income (ITTOIA s629). This significantly reduces the income tax efficiency of parent-funded bare trusts for minor children. Workaround: keep investments in a JISA (exempt from income tax and CGT entirely, regardless of who funded it) or accept the parental settlement rules and plan around them. After the child reaches 18: the parental settlement rules no longer apply — income is the adult child's income, taxed at their rate. | Junior ISA (JISA): exempt from income tax AND CGT — the most efficient wrapper for children's savings. Maximum £9,000/yr (2026). A bare trust can hold assets that are not eligible for a JISA (e.g., large one-off gifts exceeding the JISA annual limit; investments in unlisted company shares; property). A grandparent can contribute to a grandchild's JISA (up to £9,000/yr total from all sources) — this is the simplest structure. For amounts exceeding the JISA limit: a bare trust is efficient for grandparent funding (no parental settlement issue; grandchild's personal allowance absorbs income). |
| CGT in a bare trust | Capital gains in a bare trust: the gains accrue to the BENEFICIARY (the trust is transparent for CGT as well as IHT). The beneficiary's CGT annual exempt amount (£3,000 in 2025-26) applies to gains from the bare trust assets. Holdover relief (TCGA 1992 s165 and s260): available on the gift into the bare trust if the assets are business assets (s165) or if the gift is a PET or CLT (s260 — available for disposals that are PETs or CLTs). For non-business assets gifted into a bare trust: if the gift is a PET, holdover relief under s260 is NOT available (s260 requires the disposal to be a CLT, not a PET; a bare trust gift is typically a PET if to an individual beneficiary). Therefore: a gift of an investment property into a bare trust will trigger a CGT disposal unless s165 holdover applies (business assets only). | A gift into a discretionary trust is a CLT — s260 holdover relief IS available (the disposal is a CLT; s260(2)(a) TCGA). Hold-over: the donor's gain is 'held over' — the trust takes the assets at the donor's original base cost; no immediate CGT for the donor. Disadvantage: the trust then carries the deferred gain; when the trust disposes of the asset, the held-over gain crystallises. This is beneficial if the trust assets will be held for a long time (or if the trust is wound up to a lower-rate taxpayer beneficiary). | Bare trust vs discretionary trust CGT summary: bare trust — PET (no s260 holdover for non-business assets); CGT chargeable on transfer of non-business assets unless gains are within the annual exempt amount or the market value equals the original base cost. Discretionary trust — CLT (s260 holdover available); no immediate CGT on assets transferred; gain deferred into the trust. For heavily appreciated investment assets (large gains): a discretionary trust with s260 holdover may be more CGT-efficient at entry. For assets with little gain or where the CGT liability is manageable: a bare trust (PET + simpler structure) is more IHT-efficient. |
| Bare trust for minor vs JISA — which is better for children's education savings? | JISA (Junior ISA): wrapper provided by financial institutions; maximum £9,000/yr contribution; exempt from income tax and CGT entirely; child can access at 18; can be cash JISA or stocks & shares JISA; contributions from any person (grandparents, family, friends — all count toward the £9,000 annual limit). JISA is simpler than a bare trust — no trust deed; no trustee responsibilities; held directly by the child. For amounts within the £9,000 JISA limit: JISA is the preferred vehicle (maximum tax efficiency). Bare trust: no annual contribution limit; can hold a wider range of assets (unlisted shares, property, investment funds not eligible for JISA wrapper); requires a trust deed; requires a trustee; the beneficiary's personal allowance applies to income (if not in a tax wrapper). For amounts exceeding the JISA limit or for non-standard assets: a bare trust is the appropriate vehicle. | Junior SIPP: a child can hold a SIPP (Self-Invested Personal Pension); maximum contribution £2,880 net/yr (£3,600 gross after 20% basic-rate tax relief); child cannot access until minimum pension access age (currently 57; rising to 58 in 2028). A Junior SIPP is NOT a bare trust — it is a pension arrangement. It is extremely long-term (cannot access for 40+ years typically). A grandparent-funded Junior SIPP: contributions of £2,880 net/yr grow tax-free and attract government top-up; at 57 the grandchild has a pension fund. Not useful for education; very useful for long-term generational wealth transfer outside the IHT estate. | Education planning hierarchy: (1) JISA first (£9,000/yr; simplest; most tax-efficient); (2) bare trust for amounts exceeding the JISA limit (grandparent-funded; no parental settlement issue; beneficiary's allowances apply); (3) discretionary trust only if flexibility across multiple grandchildren is essential and the entry CLT charge and ongoing relevant property charges are acceptable; (4) Junior SIPP for very long-term planning (not education — minimum access age 57). A well-drafted will can leave assets directly to grandchildren in their own names (or via a bare trust in the will) — avoiding the complexities and charges of a discretionary trust. |
Bare trusts and IHT UK 2026. Bare trust definition: a trust where the beneficiary has an absolute, indefeasible, vested interest in the trust property and income; no discretion in the trustees; the trustee holds the legal title; the beneficiary holds the beneficial (equitable) title. Saunders v Vautier (1841) 4 Beav 115: a beneficiary of full legal capacity who is absolutely entitled to trust property can at any time demand the trust be wound up and the assets transferred to them. IHTA 1984: bare trusts are NOT 'relevant property trusts' — they are not subject to ss64-65 IHTA. The gift into the bare trust is a transfer of value; typically a PET (s3A IHTA) if to an individual beneficiary. Transparency: HMRC treats bare trust assets as belonging to the beneficiary for IHT, CGT, and income tax. HMRC Trusts Manual TSEM1563: a bare trust is the most simple form of trust; for CGT and income tax purposes the beneficiary and not the trustees is treated as owning the assets and making disposals. s71 IHTA 1984: accumulation and maintenance trusts (now largely replaced by BMTs and 18-25 trusts after FA 2006); not directly applicable to bare trusts. PET (s3A IHTA 1984): a transfer of value that is made by an individual (not a company or trust) to another individual (or certain trusts specified in s3A(1)); the gift into a bare trust is treated as a transfer to the individual beneficiary (because the trust is transparent) — it is a PET. If settlor dies within 7yr: PET becomes chargeable (s3A(4)); added to the cumulative chargeable transfers; IHT at 40% on any excess above the available NRB (including BPR/APR where applicable); taper relief (s7(4)) applies from year 3-7. Discretionary trust — CLT: a gift into a discretionary trust is a CLT (Chargeable Lifetime Transfer — not a PET); 20% charge at the time of the gift if the cumulative CLTs in the previous 7yr exceed the NRB; executors recalculate at death (potentially more tax). Relevant property charges (ss58-85 IHTA 1984): property in a discretionary trust is 'relevant property' (s58(1)); subject to 10-yr anniversary charge (s64 — up to 6% of the trust value); exit charge (s65 — when property ceases to be relevant property — exits the trust); effective rate = 30% × effective rate × proportion of 10yr period elapsed. JISA: Child Trust Funds Act 2004 and subsequent regulations; ISA Regulations 2016; Junior ISA wrapper; subscription limit (2026-27): £9,000/yr; tax treatment: all income and gains exempt from UK tax inside the wrapper; held in the child's name; accessible at 18; subscriptions accepted from any person (parents, grandparents, other family); no minimum age; interest/gains not counted against child's personal allowance (it's an exempt account). Parental settlement (ITTOIA 2005 s629): s629(1) — income arising to a settlement to which the settlor is not a party (made by the settlor) AND the income is accumulated or paid to or for the benefit of a minor child of the settlor is treated as income of the SETTLOR (the parent); s629(3) — if the income does not exceed £100 in a tax year, s629(1) does not apply; grandparent: NOT the parent — grandparent-funded settlements are outside s629; the grandchild's income is taxed on the grandchild, not the grandparent. CGT holdover: s260 TCGA 1992 — holdover available for disposals that are CLTs (not PETs). s165 TCGA 1992 — holdover for business assets (qualifying unlisted shares, interests in business partnerships). Bare trust CGT: a gift of non-business assets (e.g., investment property) into a bare trust is a PET for IHT; the disposal is at open market value for CGT (s17 TCGA 1992 — disposal to a connected person is at market value regardless of actual consideration). If there is a gain: CGT is chargeable unless: (a) within the annual exempt amount (£3,000 in 2025-26 for individuals); (b) holdover relief under s165 is available (business assets only); (c) principal private residence relief (s222 TCGA — if the asset is the family home, PPR may shelter the gain). No s260 holdover on PETs. Junior SIPP: stakeholder pension arrangement; Pensions Act 2004 and HMRC pension tax rules; contributions by any person (grandparents) up to £2,880 net/yr for a child; HMRC adds 20% basic-rate tax relief = £3,600 gross; the child cannot access until minimum pension access age (currently 57 under pension rules; set to rise to 58 in 2028 under Finance Act 2025 changes). Not suitable for education planning. Exempt from IHT (pensions are generally outside the estate — s151 IHTA — although DC pensions will be brought into IHT estates from April 2027 per Finance Act 2024 changes to IHTA). A Junior SIPP avoids the April 2027 DC pension IHT changes because the child is the pension holder, not the donor.
Frequently Asked Questions
Is a bare trust transparent for inheritance tax?
Yes — a bare trust is transparent for IHT. The trust assets are treated as owned by the BENEFICIARY, not the settlor or the trustees. Once a gift is made into a bare trust, the assets are outside the settlor's estate for IHT (subject to the 7-year PET clock — s3A IHTA 1984). After 7 years: the gift is fully exempt; the assets are permanently outside the settlor's estate. The bare trust assets are NOT subject to the relevant property trust charges (no 10-year periodic charge; no exit charge — ss64-65 IHTA). This is the key IHT advantage of a bare trust over a discretionary trust: there are no ongoing IHT charges on the trust fund itself. The assets are in the BENEFICIARY's estate from the date of the gift.
Can grandparents set up a bare trust for grandchildren to avoid IHT?
Yes — and it is one of the most common and tax-efficient structures for grandparent IHT planning. A grandparent gifts cash or assets into a bare trust for a named grandchild: (1) the gift is a PET (s3A IHTA 1984) — outside the grandparent's estate if the grandparent survives 7 years; (2) no 10-yr periodic charges or exit charges on the bare trust fund; (3) the income in the trust is taxed on the grandchild (the parental settlement rules of ITTOIA 2005 s629 do NOT apply to grandparent-funded bare trusts — those rules only apply to PARENT-funded trusts); (4) the grandchild's personal allowance (£12,570) and CGT annual exempt amount (£3,000) shelter income and gains. The grandchild receives the assets at 18. For amounts within the Junior ISA limit (£9,000/yr): a JISA is simpler. For larger amounts or non-JISA assets: a bare trust is the appropriate vehicle.
What is the difference between a bare trust and a discretionary trust for IHT?
The key IHT differences: (1) ENTRY CHARGE: bare trust gift = PET (no immediate IHT; 7yr clock); discretionary trust gift = CLT (20% charge on excess above the NRB). (2) ONGOING CHARGES: bare trust: NONE (no periodic charges; no exit charges); discretionary trust: 10-yr periodic charge (up to 6%) + exit charges (ss64-65 IHTA). (3) CONTROL: bare trust: the beneficiary is fixed from the date of the gift; once the beneficiary is 18, they can demand the assets (Saunders v Vautier); discretionary trust: trustees can vary who benefits — more flexible. (4) CGT: bare trust gift = PET (s260 holdover NOT available for non-business PETs — gift triggers CGT if assets have gains); discretionary trust gift = CLT (s260 holdover IS available). Summary: for straightforward gifts to identified grandchildren/children where the settlor is happy to fix the beneficiary: bare trust is more IHT-efficient. For complex family situations needing flexibility: discretionary trust is preferred despite the IHT charges.
When can a beneficiary access the assets in a bare trust?
Under English law: a beneficiary of a bare trust has an absolute entitlement to the trust assets and income from the date the trust is created (or from the date they become the named beneficiary). For a beneficiary who is 18 or over with legal capacity: they can demand the assets at any time — the trustee must comply (Saunders v Vautier [1841]). For a minor (under 18): the trustee holds the assets for the minor's benefit; the minor is the beneficial owner but cannot legally demand the assets until they reach 18. The trustee manages the assets (investing them, collecting income) until the minor turns 18, at which point the adult beneficiary can demand the full trust fund. There is NO mechanism for the settlor to recover the assets or change the beneficiary once a bare trust is validly created — unlike a discretionary trust where trustees have flexibility.
Do parental settlement income tax rules apply to a grandparent's bare trust for a grandchild?
No — the parental settlement income tax rules (ITTOIA 2005 s629) do NOT apply to grandparent-funded bare trusts. The s629 rules apply only when a PARENT (or their spouse/civil partner) funds a settlement for their own minor child. When a GRANDPARENT (or any non-parent person) funds a bare trust for a grandchild: the income in the trust is taxed on the GRANDCHILD (the beneficiary), not the grandparent. If the grandchild has no other income: their personal allowance (£12,570 in 2026) shelters the income; they pay 0% on the first £12,570. This makes grandparent-funded bare trusts very income-tax efficient — much more so than parent-funded bare trusts (where the parental settlement rules apply, causing the income to be taxed at the parent's marginal rate if it exceeds £100/yr).
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