Trust Fund for Children UK: How to Set One Up, Types and Tax Treatment (2026)

A trust fund for children is a legal arrangement in which assets (cash, investments, property, or a combination) are held by one or more trustees for the benefit of a child or children. The trustees manage the assets according to the terms of the trust deed (or will, if the trust is created by will), and the child (the beneficiary) receives the assets — or an income from them — at the time specified in the trust, most commonly when they reach a specified age such as 18, 21, or 25. HOW IT DIFFERS FROM GIVING MONEY DIRECTLY: if you give money directly to a child under 18, you cannot legally hand it to them outright (they cannot hold legal title to most assets or enter binding contracts). Without a trust, the money is typically held informally by a parent, which creates control but no formal protection. A trust gives formal legal structure: trustees hold the legal title, the child has beneficial rights, and the trust terms control how and when the child accesses the fund. WHY PARENTS AND GRANDPARENTS USE THEM: (1) to control the age at which children access the money (e.g., waiting until age 21 or 25 rather than 18); (2) to protect the fund from the child's creditors or a future divorce; (3) to hold an inheritance from a will until the child is old enough to manage it; (4) for tax planning — though the tax advantages depend heavily on who funds the trust (parent or grandparent) and the type of trust used. WHO CAN SET ONE UP: any adult can create a trust for a child — parents, grandparents, other relatives, or family friends. The trust is created by a written trust deed. If the trust is created in a will, it comes into effect on the testator's death. A solicitor or trust specialist usually drafts the deed for a lifetime trust, although simple bare trusts can be set up informally.

There are several types of trust available for holding assets for children. Each has different tax treatment and levels of flexibility. BARE TRUST (ABSOLUTE TRUST): the simplest type. The child has an absolute, unconditional right to both the capital and income from the trust. The trustees hold the assets as nominees for the child — they have no discretion. When the child reaches 18 (the age of majority), they are legally entitled to demand the assets immediately. Tax treatment: the child is treated as the beneficial owner for income tax and CGT purposes, so income and gains are assessed on the child (not the trustees). The child's own personal allowances (income tax: £12,570; CGT: £3,000 for 2025/26) apply. Exception: if a parent funds the trust, the parental settlement rule applies — income from a parental gift of over £100 per year is taxed on the parent, not the child. Bare trusts are commonly used by grandparents, other relatives, and parents (accepting the parental settlement rule for income). DISCRETIONARY TRUST: the trustees have discretion over when and how much income and capital to pay to the beneficiaries. The child (and possibly other named beneficiaries) is a potential beneficiary, but has no fixed right to anything until the trustees exercise their discretion. Flexibility: excellent — trustees can adapt payments to the child's changing needs, and the trust fund is not at risk if the child has creditors. Tax treatment: less favourable — income retained in the trust is taxed at 45% (the 'trust rate'); distributions to a child beneficiary are grossed up at 45% and the child can reclaim excess tax if their personal rate is lower. CGT annual exempt amount is reduced (£1,500 for 2025/26 for most discretionary trusts, split between trusts created by the same settlor). IHT: if the settlor contributes more than their available nil-rate band (£325,000), a lifetime IHT charge arises at 20% on the excess; thereafter periodic charges apply every 10 years. WILL TRUST (BEREAVED MINOR'S TRUST / 18-25 TRUST): created in a will to hold assets for a child until they reach a specified age. A trust for bereaved minors (TBM) must vest absolutely at 18 and is IHT-free on vesting. An 18-25 trust can delay vesting until age 25, but an exit charge applies between ages 18 and 25. These trusts are ideal for parents with young children to ensure an orderly inheritance if both parents die. FLEXIBLE LIFE INTEREST TRUST: can also benefit children but is typically used for a surviving spouse first — see the separate guide on flexible life interest trusts.

The parental settlement rule (Income Tax (Trading and Other Income) Act 2005, ss.629-632) is an anti-avoidance provision that prevents parents from diverting their own income to their minor children through gifts and trusts in order to use the child's lower tax rates. HOW IT WORKS: where a parent makes a settlement (which includes an outright gift, a bare trust, or any other arrangement) out of which income arises, and the child beneficiary is under 18 and unmarried/not in a civil partnership, any income from the settlement that exceeds £100 per tax year is treated as the parent's income — not the child's. The £100 limit applies per parent per child per tax year. EXAMPLE: a mother puts £20,000 into a bare trust for her daughter aged 8. The trust earns £400 interest in the tax year. Because this exceeds £100, the full £400 is taxed on the mother at her income tax rate. If the interest were only £80, it would be taxed on the daughter using her personal allowance. WHAT IS NOT CAUGHT: the parental settlement rule does not apply to: (a) capital gains — a child's own CGT annual exempt amount applies to gains even from a parental gift; (b) income once the child reaches 18; (c) settlements made by grandparents, other relatives, or friends — only parental settlements are caught. PLANNING IMPLICATION: for parents, bare trusts are most useful for capital growth assets (shares, investment funds) rather than income-producing assets, because CGT gains can be sheltered in the child's allowance while income is caught by the parental settlement rule. GRANDPARENTS: a grandparent setting up a bare trust for a grandchild does not face the parental settlement rule — income is taxed on the grandchild using their own allowances (including the personal allowance), making bare trusts an extremely tax-efficient vehicle when funded by grandparents.

The tax treatment of a children's trust fund depends on the type of trust and who funded it. Here is a summary by tax head: INCOME TAX: Bare trust — income is assessed on the child at their personal income tax rates. If a parent funded the trust, income over £100/year is taxed on the parent (parental settlement rule). Discretionary trust — undistributed income is taxed at the trust rate (45% for non-dividend income, 39.35% for dividend income) within the trust. Distributions to the child are made with a 45% tax credit; the child can reclaim excess tax to the extent their personal income tax rate is lower. The first £1,000 of trust income is taxed at the standard rates (20% for non-savings income, 8.75% for dividends) rather than trust rates — the 'standard rate band'. CAPITAL GAINS TAX: Bare trust — gains are assessed on the child at their CGT rates (18% for basic rate taxpayers, 24% for higher rate, with a £3,000 annual exempt amount for 2025/26). No parental settlement rule applies to CGT. Discretionary trust — trustees pay CGT at 20% (or 24% for residential property) on gains above £1,500 (the annual exempt amount for most trusts). Where there are multiple trusts created by the same settlor, the £1,500 is split equally between them, minimum £300 each. INHERITANCE TAX: Bare trust — the settled assets are treated as belonging to the child absolutely. No IHT on the trust fund itself (subject to the parental settlement rule for income, but not assets). Discretionary trust — relevant property regime: 20% entry charge on gifts above the nil-rate band, 10-yearly periodic charge of up to 6%, and exit charges on distributions. For grandparent-funded trusts, small annual gifts (£3,000 per year per donor) are IHT-exempt; larger gifts are potentially exempt transfers provided the settlor survives seven years. STAMP DUTY LAND TAX: transferring property into a bare trust is treated as a disposal for SDLT — SDLT may be payable if the property has a mortgage attached.

Setting up a trust fund for a child involves the following steps: STEP 1 — CHOOSE THE TYPE: decide between a bare trust (simple, vests at 18, no discretion), a discretionary trust (flexible, higher tax cost), or a will trust (takes effect on death). For a lifetime trust funded by grandparents, a bare trust is often best for tax efficiency and simplicity. For parents or where flexibility is needed, a discretionary trust may be preferable despite its tax complexity. STEP 2 — DRAFT THE TRUST DEED: a trust deed sets out the trustee's powers, the beneficiary or beneficiaries, the vesting age (for bare trusts this is fixed at 18 by law; for discretionary trusts it is specified in the deed), and any specific investment or distribution restrictions. For a bare trust, the deed can be short and relatively simple. For a discretionary trust, a specialist solicitor or trust professional should draft it. Cost of a simple bare trust deed: £200-£500 from a solicitor; online templates are available for very simple arrangements but professional review is recommended. STEP 3 — APPOINT TRUSTEES: appoint at least two trustees (or a trust corporation). Trustees must be 18 or over, of sound mind, and willing to act. Consider who you trust to manage the fund responsibly and whether a professional trustee should co-act for larger funds. STEP 4 — FUND THE TRUST: transfer cash, investments, or property into the trust. For cash, open a trust bank account in the trustees' names (e.g., 'J Smith and A Smith as trustees of the [child's name] Trust'). For shares or investments, re-register them in the trustees' names. For property, a SDLT assessment is needed. STEP 5 — REGISTER ON THE TRUST REGISTRATION SERVICE: from October 2022, most UK express trusts (including bare trusts holding assets for children, except very narrow exceptions) must be registered on HMRC's Trust Registration Service within 90 days. Non-registration can result in penalties. STEP 6 — MAINTAIN RECORDS: trustees must keep accounts, file tax returns (SA900 for complex trusts; simpler reporting for bare trusts), and act in the child's best interests. COSTS: ongoing costs depend on the trust's complexity — a simple bare trust holding cash in a savings account may have minimal costs; a trust holding investments may need annual administration, tax filings, and possibly professional trustee fees.

What happens when a child turns 18 depends entirely on the type of trust. BARE TRUST: when the child reaches 18, the trust effectively ends — the child has an immediate, enforceable right to demand the trust assets. The trustees must transfer the assets to the (now adult) beneficiary on request. The child's right is absolute: the trustees cannot delay or refuse. If the trustees hold shares or property, they must execute the relevant transfers. Tax: there is no CGT charge on transferring a bare trust to the 18-year-old beneficiary because the beneficial ownership has always been the child's — there is no disposal for CGT by the trustees. DISCRETIONARY TRUST: the trust continues past the child's 18th birthday unless the trust deed specifies that the trust ends at 18 or the trustees choose to appoint all assets to the now-adult beneficiary. The child (now an adult beneficiary) still has no fixed right to the fund — only the right to be considered. Trustees may decide to distribute some or all of the capital, continue the trust for later distribution, or add further beneficiaries. WILL TRUST (BEREAVED MINOR'S TRUST): must vest absolutely at 18 — the trust ends and the assets pass to the young adult outright. No IHT charge on vesting at 18. WILL TRUST (18-25 TRUST): the trustees can defer vesting until age 25. An exit charge at rates up to 4.2% (broadly) applies on distributions between ages 18-25. After 25, no further exit charges. PRACTICAL TIP: where a discretionary trust is intended to hold assets until age 21 or 25, include clear drafting specifying the intended distribution age and the trustees' power to advance capital before that age for education, housing, or other needs. Without clear drafting, beneficiaries who reach 18 may have claims under the rule in Saunders v Vautier (1841) — they can collapse the trust if all beneficiaries are adults and absolutely entitled.