Trusts for Children and Inheritance Tax UK 2026: Bereaved Minor Trusts, 18-25 Trusts, Disabled Person Trusts, Bare Trusts vs Discretionary Trusts
The IHT treatment of a trust for children depends entirely on which type you use. A bereaved minor trust has zero IHT periodic charges. A discretionary trust has up to 6% per decade. Choosing the right type can save tens of thousands.
All Parents With Minor Children Should Have a Bereaved Minor Trust in Their Will
A bereaved minor trust (s71 IHTA) created in your will for your own minor children is completely outside the IHT relevant property regime — no periodic charges; no exit charges; assets held safely until age 18. Without this provision, assets left to minors may require a court application or pass directly to the child at 18 without protection. Include bereaved minor trust provisions in every parent's will.
| Trust Type | Conditions | IHT Treatment | Example |
|---|---|---|---|
| Bereaved Minor Trust (s71 IHTA 1984) | Strict conditions: (1) set up under the WILL (or intestacy) of the deceased PARENT of the child — the deceased must be the child's parent; (2) the child must be a BEREAVED MINOR — the child whose parent died (not a grandchild; not a niece/nephew); (3) the trust must terminate by age 18 — the bereaved minor must become absolutely entitled to all trust assets (capital, income, and accumulated income) by their 18th birthday; (4) income during the trust must be applied for the benefit of the bereaved minor only; (5) no other person can benefit from the trust while the bereaved minor is under 18. These five conditions are STRICT — failure to meet any one of them removes the s71 IHTA exemption. | OUTSIDE the relevant property regime. NO 10-yr periodic charge (s64 IHTA does not apply). NO exit charge (s65 IHTA does not apply). At age 18: the trust terminates and the beneficiary takes assets absolutely — no IHT exit charge on vesting. The trust is entirely IHT-neutral for the period from creation to age 18. NOTE: if the trust is settled by the parent in their will with more assets than the NRB, the creation of the trust itself is not a CLT (it passes through the estate at death and is charged in the normal estate IHT on death — but the assets in the bereaved minor trust do not suffer further IHT periodic/exit charges during the trust period). | Mother dies leaving £600k estate; will creates a bereaved minor trust for her two children (£250k each). Estate IHT calculated normally (£600k − £325k NRB × 40% = £110k IHT). The £250k going into the bereaved minor trust: no further 10yr periodic charges during the children's minority. At 18: each child takes £250k (less trust administration) with no additional IHT exit charge. Compare: if the same will had created a DISCRETIONARY trust (not bereaved minor): the £250k in the trust would be subject to 10-yr periodic charge (up to 6% per decade on the value above the NRB) — if the trust held £250k above the NRB used on death, the periodic charge could be significant. |
| 18-25 Trust (s71D IHTA 1984 — Finance Act 2006) | Similar to bereaved minor trust but can continue to age 25 (not 18). Conditions: (1) set up under the WILL (or intestacy) of a deceased PARENT; (2) the principal beneficiary must have become absolutely entitled to all trust assets by age 25; (3) income must be applied for the principal beneficiary; (4) no other person can benefit while the principal beneficiary is under 25. Unlike bereaved minor trusts: 18-25 trusts can also be set up for a child whose PARENT IS ALIVE (the grandparent can set up an 18-25 trust in their will for a grandchild, for instance — as long as the trust conditions are met). The 18-25 trust is more flexible than the bereaved minor trust in the range of beneficiaries that can qualify. | OUTSIDE the relevant property regime from creation to age 18 (same as bereaved minor trust — no charges). EXIT CHARGE at vesting (age 18-25): a proportional exit charge applies when the beneficiary becomes absolutely entitled between ages 18 and 25. Rate: calculated as [effective rate × (years from age 18 to vesting date ÷ 40)]. Effective rate is based on the hypothetical cumulative CLT at the last 10yr anniversary. Maximum exit charge: for a beneficiary vesting at exactly age 25 (7yr above 18): effective rate ≤ 6% (max); 7/40 of 6% = 1.05% of chargeable value per year of the relevant period = ≤ 4.2% total (for 7yr from 18 to 25 at 6% per decade maximum effective rate). In practice most 18-25 trust exit charges are well below 4.2% because the effective rate is lower than 6% (the trust may have been running for years with assets below the NRB). | Father dies; will creates an 18-25 trust for son (age 12) with £400k. No 10yr charge during ages 12-22 (within the no-charge period). At age 22 (4yr above 18): exit charge = 4yr × (effective rate/40) × £400k. If effective rate is 4% (trust assets well within NRB throughout): 4% × 4/40 × £400k = 4% × 0.1 × £400k = £1,600 exit charge on £400k. Negligible. If effective rate is 6% (trust at its maximum): 6% × 4/40 × £400k = 6% × 0.1 × £400k = £2,400 — still modest. |
| Disabled Person's Trust (s89 IHTA 1984) | The PRINCIPAL BENEFICIARY must be a 'qualifying disabled person' (s89B IHTA): (1) a person who is mentally disabled (incapable of administering their property or managing their affairs due to a mental disorder — Mental Health Act 1983); OR (2) a person who is physically disabled and receives: Attendance Allowance; OR Personal Independence Payment (PIP) — daily living component (standard or enhanced rate); OR Disability Living Allowance (DLA) — care component at middle or highest rate; OR Armed Forces Independence Payment. The trust must be set up so that: at least half of the trust income in any year is applied for the benefit of the disabled person; the disabled person's interest terminates only on their death or earlier application of trust funds for their benefit. | OUTSIDE the relevant property regime entirely. NO 10-yr periodic charge. NO exit charges. The disabled beneficiary is treated as the BENEFICIAL OWNER of the trust assets — the trust assets are in the DISABLED PERSON's IHT estate (not the settlor's estate). When the disabled person dies: the trust assets (subject to any charitable legacies or life insurance) form part of their estate for IHT. IHT advantages for the SETTLOR: assets settled into a disabled person's trust are PETs (not CLTs) if the settlor is alive — 7yr clock; potentially fully exempt after 7yr. No entry charge (the PET is potentially exempt). The disabled person's trust is one of the most IHT-efficient trust structures available in the UK. | Parent settles £500k into a disabled person's trust for an adult disabled child. Gift = PET (s3A IHTA) — outside the estate if parent lives 7yr (or tapered from year 3). Trust assets: in the DISABLED CHILD's estate for IHT (not the parent's). Trust assets after 7yr: outside the parent's estate entirely; within the child's estate (but the child likely has low or no IHT exposure). Result: £500k moved out of the parent's estate with no CLT entry charge; no periodic charge; no exit charge. IHT saving potential: £500k × 40% = £200k IHT saved (if the parent's estate was above NRB). |
| Bare Trust for a Child (nominee / Custodian Trust) | A bare trust: the child is the ABSOLUTE BENEFICIAL OWNER of the assets; the trustee/custodian holds the legal title on behalf of the child until the child reaches majority (18 in England and Wales). Common uses: children's savings accounts (e.g., JISA — Junior ISA — is technically a bare trust for the child); investment accounts in the child's name managed by a parent/guardian. For IHT: a gift TO a bare trust = a GIFT TO THE CHILD (the child is the beneficial owner immediately). PET (s3A IHTA): if the gift is from an adult to a competent adult beneficiary — 7yr clock. For gifts to children (under 18): the gift is treated as an immediate absolute gift to the child; the child's estate includes the bare trust assets. PARENTAL SETTLEMENT INCOME TAX TRAP (s629 ITTOIA 2005): if a PARENT funds a bare trust for their MINOR (under 18) UNMARRIED child, income > £100/yr from the gifted assets is taxed on the parent as if it were the parent's income (parental settlements rules — to prevent income shifting to a lower-rate taxed child). This does not affect the IHT position but is a significant income tax consideration. | The bare trust assets are in the CHILD's IHT estate (not the donor's). For IHT planning: the gift to a bare trust is a PET (s3A IHTA) — falls outside the donor's estate after 7yr (or on death after 7yr). No entry charge (PET not CLT). No trust periodic charges (bare trust is not a relevant property trust — the assets are absolutely owned by the beneficiary). Income tax: parental settlement trap if parent gifts to minor child (income ≥£100 taxed on parent). Grandparent bare trust: not subject to the parental settlement trap — grandparent can gift to grandchild bare trust without the income tax trap applying. | Grandparent sets up a bare trust investment account for grandchild; gifts £50,000. Gift = PET (s3A IHTA) — outside grandparent's estate after 7yr. Assets in grandchild's estate. Grandchild earns £2,000 pa investment income: taxed on GRANDCHILD at their rates (not on grandparent — grandparent is not the parent). If grandchild has no other income: personal allowance (£12,570) absorbs all income — income tax free. IHT saving: £50k outside grandparent's estate (after 7yr PET period); saving = £50k × 40% = £20k IHT saved. |
| Discretionary Trust for Children — RELEVANT PROPERTY (not bereaved minor) | A discretionary trust where trustees hold assets for a class of potential beneficiaries (e.g., children and grandchildren) with the ability to appoint to any member of the class at any time. Can be created in a will OR during lifetime. If the bereaved minor trust or 18-25 trust conditions are NOT met (e.g., because the trust is set up by a grandparent for grandchildren, or continues beyond 25, or is settled in lifetime rather than by will): the trust is a RELEVANT PROPERTY trust. Very flexible: trustees can add beneficiaries; appoint to different beneficiaries in different proportions; accumulate income; apply capital for emergencies. | RELEVANT PROPERTY REGIME (ss58-68 IHTA 1984): ENTRY CHARGE (CLT on creation): if the settled amount exceeds the NRB (£325k), a CLT entry charge of 20% applies to the excess on creation (or lifetime gift into the trust). EXIT CHARGES (s65 IHTA): when assets leave the trust (to a beneficiary): a fraction of the effective rate applies based on years since last 10yr anniversary (s68 IHTA). 10-YR PERIODIC CHARGE (s64 IHTA): on the 10th and subsequent anniversaries of the trust: up to 6% of the chargeable value above the effective NRB. ANNUAL CHARGE: the 6% per decade is 0.6%/yr effective. COMPARISON TO BEREAVED MINOR TRUST: a bereaved minor trust saves all these charges; a discretionary trust for the same children would cost up to 6% per decade. For large family trusts: the cumulative 10-yr periodic charges can be significant over multiple decades. | Grandparent settles £600k into a discretionary trust for grandchildren during lifetime. NRB: £325k. Entry CLT: (£600k − £325k) × 20% = £55k IHT entry charge. 10yr anniversary (trust still holds £600k): effective rate (approx, ignoring indexation): 6% max. 6% × (£600k − £325k) = 6% × £275k = £16.5k periodic charge at 10yr. At 20yr: another £16.5k (if same value). Contrast: a bereaved minor trust with the same £600k: no entry charges (passes through estate at death); no periodic charges; no exit charges up to 18; modest exit charges 18-25 under s71D. Bereaved minor trust is dramatically more IHT-efficient than discretionary for the same beneficiaries. |
Trusts for children IHT UK 2026. s71 IHTA 1984: bereaved minor trusts — no periodic/exit charges; terminates at 18; only for child of deceased parent whose will/intestacy creates the trust; income applied for bereaved minor; no other beneficiary while under 18. HMRC IHTM42805-42875. s71D IHTA 1984 (inserted by Finance Act 2006 Sch 20): 18-25 trusts; exit charge from age 18 to vesting; max 4.2% at age 25; income applied for principal beneficiary; absolute by 25; s71D(4) formula for exit charge rate; no periodic charge. HMRC IHTM42700-42715. s89 IHTA 1984: disabled person's trusts; qualifying disabled person (s89B IHTA — Mental Health Act 1983 s1; or benefit-recipient test); outside relevant property regime; trust assets in beneficiary's estate; PET entry for lifetime gifts by settlor; gift into trust during lifetime = PET (not CLT); HMRC IHTM17251-17283. Bare trust: legal title held for beneficial owner; not a separate trust for IHT (the beneficial owner has the asset directly); s629 ITTOIA 2005: parental settlement — income > £100 from parent's gift to minor unmarried child taxed on parent; does not apply to grandparent/aunt/uncle gifts. Junior ISA: a form of bare trust for the child (up to £9,000/yr; tax-free growth; ISA wrapper; child accesses at 18); not relevant property. Accumulation and Maintenance (A&M) trusts: Finance Act 2006 Sch 20 abolished the A&M regime for new trusts from 22 March 2006; existing A&M trusts had until 6 April 2008 (later extended to 6 October 2008) to convert to: bereaved minor trusts; 18-25 trusts; or interest in possession trusts (IPDI); if not converted: became relevant property trusts from 6 April 2008. Finance Act 2006: major overhaul of trusts; interests in possession in trusts no longer treated as IPDIs unless they were immediate post-death interests (s49A IHTA); pre-22 March 2006 I-in-P trusts: transitional serial interest provisions (s49B-s49E IHTA). IPDI (immediate post-death interest): s49A IHTA — an interest in possession in a settlement created in a will or under intestacy, taking effect immediately on death; treated as if the beneficiary owns the underlying assets (not a relevant property trust); assets in beneficiary's estate for IHT. Relevant property regime: ss58-68 IHTA. Entry CLT charge on lifetime settlement (s2 IHTA — chargeable transfer): 20% on excess above available NRB; cumulative CLT 7yr look-back. 10-yr periodic charge s64: applies every 10 years; rate = hypothetical effective rate × 30%; effective rate derived from hypothetical gross transfer including notional NRB. s65 exit charge: applies when assets leave the trust; proportional to years since last 10yr anniversary. Maximum 10yr periodic rate: 6% (30% × 20% hypothetical chargeable transfer rate). s68: exit charge in first 10yr. Finance Act 2026: no change to bereaved minor trust or 18-25 trust regime; BPR cap affects trust assets qualifying for BPR (if the trust holds BPR-qualifying assets, the £1m cap applies at the 10yr anniversary calculation for relevant property trusts). Holdover relief (s165 TCGA, s260 TCGA): gifts of assets into relevant property trusts can hold over CGT — s260 applies (CLT entry); the recipient trust takes the donor's base cost.
Frequently Asked Questions
What is the best trust for children for inheritance tax in the UK?
The most IHT-efficient trust for children depends on the circumstances: (1) BEREAVED MINOR TRUST (s71 IHTA): the most IHT-efficient option — no periodic charges and no exit charges. Available ONLY when a PARENT dies and leaves assets in trust for their own minor child (in the will or under intestacy); the trust must end at age 18. (2) 18-25 TRUST (s71D IHTA): similar benefits; the trust can continue to age 25; a proportional exit charge applies at vesting (max ~4.2% at age 25). Available more broadly — can be set up for grandchildren by grandparents too. (3) DISABLED PERSON'S TRUST (s89 IHTA): no relevant property charges; the disabled beneficiary is treated as the beneficial owner. Best option where the beneficiary qualifies. (4) BARE TRUST: assets immediately in the child's estate; a PET from the donor; income tax trap for parental settlements. (5) DISCRETIONARY TRUST: most flexible but most expensive — relevant property regime with 10-yr periodic charges and exit charges. A bereaved minor trust or 18-25 trust is almost always preferred over a discretionary trust for children where the conditions can be met.
What is a bereaved minor trust and how does it avoid inheritance tax?
A bereaved minor trust (s71 IHTA 1984) is a trust created in the will (or under the intestacy) of a PARENT for their child who has lost that parent. The trust is completely outside the relevant property regime — no 10-yr periodic charge (s64 IHTA) and no exit charges (s65 IHTA). Conditions: (1) must be set up under the deceased PARENT's will or intestacy; (2) the beneficiary must be the CHILD OF THE DECEASED (not a grandchild or niece/nephew); (3) the child must become absolutely entitled to all trust assets by age 18; (4) income must be applied only for the bereaved minor's benefit; (5) no other person can benefit while the child is under 18. At age 18: the trust terminates and the child takes assets absolutely — no IHT exit charge. The trust avoids the relevant property regime entirely. This is why wills for parents with minor children should almost always include bereaved minor trust provisions — the IHT and practical benefits (keeping assets managed until 18) are significant.
What is an 18-25 trust and what are the inheritance tax charges?
An 18-25 trust (s71D IHTA 1984, introduced by Finance Act 2006) is a trust where the beneficiary must become absolutely entitled to the trust assets by age 25 (not 18 as for a bereaved minor trust). No IHT charges from creation to age 18 (same as bereaved minor trust). EXIT CHARGE at vesting between ages 18-25: calculated as a proportional exit charge — the maximum effective rate is 6% per decade × (years from 18 to vesting ÷ 40). For a beneficiary vesting at age 25 (7yr above 18): max exit charge = 6% × 7/40 = 1.05% per year = ≤ 4.2% of chargeable value. In practice the exit charge is often much lower than 4.2% (because the effective rate depends on the trust's cumulative CLT history — if the trust assets are well within the NRB, the effective rate is closer to 0%). Compared to a discretionary trust: a discretionary trust could accrue up to 6% per decade in periodic charges plus exit charges — significantly more expensive than the 18-25 trust exit charge. The 18-25 trust is the preferred structure for parents who want to delay distribution to children until age 21-25 without the full relevant property charges.
Can I set up a trust for my grandchildren to avoid inheritance tax?
Yes — but the type of trust determines the IHT efficiency: (1) 18-25 TRUST (s71D IHTA): a grandparent can set up an 18-25 trust for grandchildren in their will; the trust must terminate by the grandchild's 25th birthday; no periodic charges during the trust; exit charge at vesting (max ~4.2% at age 25); much more efficient than a discretionary trust. (2) DISABLED PERSON'S TRUST (s89 IHTA): if the grandchild is a qualifying disabled person, a disabled person's trust can be set up by the grandparent — no relevant property charges. (3) DISCRETIONARY TRUST: a grandparent can leave assets in a discretionary trust for grandchildren; most flexible (trustees can adjust for multiple grandchildren; continue beyond 25); but subject to the relevant property regime (entry CLT charge + 10-yr periodic + exit charges). (4) BARE TRUST: a grandparent can set up a bare trust investment for a grandchild — PET from the grandparent (7yr clock); assets in the grandchild's estate; NO parental settlement income tax trap (it applies only to parents, not grandparents). The 18-25 trust is usually the most IHT-efficient option for grandparents wanting to benefit grandchildren in their wills.
What is a disabled person's trust for inheritance tax?
A disabled person's trust (s89 IHTA 1984) is a trust where the principal beneficiary is a qualifying disabled person — someone who is either mentally disabled (incapable of managing their affairs) or physically disabled and receiving Attendance Allowance, Personal Independence Payment (daily living component), Disability Living Allowance (middle/highest care rate), or Armed Forces Independence Payment. IHT advantages: (1) OUTSIDE the relevant property regime — no 10-yr periodic charge; no exit charges. (2) The disabled person is treated as the beneficial owner of the trust assets — the assets are in the DISABLED PERSON's estate (not the settlor's). (3) If the settlor is alive and makes the gift to the trust: it is a PET (s3A IHTA) — outside the estate after 7yr (no CLT entry charge). This combination (PET entry + no trust charges + outside settlor's estate) makes the disabled person's trust one of the most IHT-efficient structures available. The trust must be structured so that at least half of the trust income in any year is applied for the benefit of the disabled beneficiary.
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