Bare Trusts and Children's Investments: A Guide for Parents and Grandparents

Many parents and grandparents wish to set aside money for the next generation — to fund education, provide a deposit for a first home, or simply pass on wealth ahead of potential inheritance tax charges. A bare trust is one of the simplest structures for doing so. Yet bare trusts are frequently misunderstood, and the tax rules governing them are not always straightforward, particularly where parents are the source of the funds.

What Is a Bare Trust?

A bare trust is the simplest form of trust. The trustee holds assets on behalf of a beneficiary who has an absolute, vested, and indefeasible right to both the trust assets and any income from them. Unlike a discretionary trust, where the trustee has flexibility over who benefits and when, a bare trust beneficiary is entitled to the assets immediately (or at age 18 in England and Wales, when they can call for the assets to be transferred to them).

In practice, a bare trust for a child typically:

• Names one or more trustees (usually the parent or grandparent)
• Identifies the child as the sole beneficiary
• Holds assets (cash, investments, shares) on behalf of the child until they reach 18

The child is the beneficial owner of the assets from the outset. The trustee manages the assets but has no discretion over who ultimately benefits.

Setting Up a Bare Trust

A bare trust can be created informally — by a parent opening an investment or savings account in their own name "as bare trustee for" the child — or through a formal trust deed. For investments of any significance, a simple written trust deed provides important legal clarity and avoids disputes about the nature of the arrangement.

Financial platforms increasingly offer "bare trust" account structures for this purpose, particularly for investment accounts.

Tax Treatment of Bare Trusts

Income tax. The child is treated as the beneficial owner of the trust assets, so income from the trust is taxable as the child's income. Children have the same personal allowance as adults (£12,570 in 2026/27). A child who has no other income can therefore receive investment income up to this amount free of income tax.

The parental settlement rules. There is a critical exception: where a parent (not a grandparent or other donor) sets up a bare trust for their unmarried minor child, any income above £100 per year arising from the parent's contribution is treated as the parent's income for tax purposes, not the child's. This applies to each parent separately — the limit is £100 per parent per tax year.

The parental settlement rules were designed to prevent parents from using children's allowances to shelter investment income. They catch bare trusts, direct gifts, and accounts held in a child's name — any investment held for the benefit of a minor child that originated from a parental gift is caught.

The practical implications:

• Gifts from grandparents, other relatives, or friends do not trigger the parental settlement rules
• Gifts from parents trigger the rules on income above £100 — interest, dividends, and distributions are taxable in the parent's hands until the child turns 18 (or the assets are no longer held for the child's benefit)
• Capital gains are not caught by the parental settlement rules — CGT is taxable in the child's name, using the child's annual CGT exemption

This makes bare trusts funded by parents more tax-efficient for capital growth than for income generation.

Capital gains tax. Gains within a bare trust are taxable in the beneficiary's (child's) hands using the child's own annual exempt amount (£3,000 from 2024/25). A child with no other capital gains can dispose of assets within the bare trust without paying CGT on gains up to this limit.

Inheritance tax. A gift into a bare trust is a potentially exempt transfer (PET) for IHT purposes. Provided the donor survives seven years, the gift falls outside their estate entirely. There are no periodic charges or exit charges (unlike discretionary trusts), making bare trusts simpler from an IHT perspective.

At age 18. When the beneficiary reaches 18, they have an absolute right to demand the assets. If they do not choose to exercise this right, the arrangement becomes a trust of full age adult — and the bare trust rules continue to apply for tax purposes. However, in practice, many bare trusts are unwound at 18 as the beneficiary takes control of their assets.

Bare Trusts vs Junior ISAs

The Junior ISA (JISA) is the most tax-efficient vehicle for investing for children in most circumstances:

• Annual subscription limit: £9,000 per child (2026/27)
• All investment growth and income is free of UK income tax and CGT within the wrapper
• The child gains control at 18 and can access the funds from that age
• Parental settlement rules do not apply to JISAs — parents can fund a JISA without triggering an income tax charge

The JISA wins on tax efficiency for UK-resident families. Its limitations:

• Funds are locked until age 18 (cannot be accessed earlier except in terminal illness)
• The annual subscription limit caps contributions
• Not available to children who were born as beneficiaries of Child Trust Funds (CTFs), though CTFs can be converted to JISAs

A bare trust is more appropriate where:

• The investment is funded by grandparents (escaping parental settlement rules)
• The capital growth focus means the parental settlement rules are less important
• The amount to be invested exceeds the JISA annual limit
• Flexibility on timing of distribution (not locked until 18) is important

Bare Trusts for Grandparents

Bare trusts funded by grandparents escape the parental settlement rules entirely. Income generated within the bare trust is taxed in the child's hands at the child's rates. A grandchild with no other income can receive up to £12,570 in investment income free of tax.

This makes a grandparent-funded bare trust a highly efficient vehicle for:

• Education funding (particularly school fees, which can run to £40,000–£50,000 per year at independent schools)
• Intergenerational IHT planning (gifts into bare trusts are PETs, and income and gains are sheltered in the grandchild's allowances)
• Passing accumulated savings to grandchildren in a controlled, structured way

Grandparents should also consider gifting into JISAs (they can contribute to a grandchild's JISA, subject to the £9,000 annual limit), pension contributions for a child (up to £3,600 per year, even if the child has no earnings), or direct gifts.

Alternatives for International Families

For internationally mobile families, UK-centric structures (JISA, bare trust under UK trust law) may not be the most appropriate:

• If the child is not UK-resident, JISA is not available
• Offshore investment bonds structured for children's benefit may offer greater flexibility
• Trusts governed by non-UK law may be appropriate if the family is not primarily UK-connected

The choice of structure for investing for children should take account of the family's expected long-term country of residence, the child's likely place of education, and the tax treatment in the relevant jurisdictions.

Practical Steps

1. Decide on the funding source (parent vs grandparent — affects parental settlement rules)
2. Maximise Junior ISA contributions first if the child is UK-resident and the £9,000 limit is not already being used
3. For larger amounts or non-JISA-eligible children, consider a formally documented bare trust
4. Invest in assets suited to capital growth rather than income if the parental settlement rules apply
5. Review the arrangements annually and consider unwinding before age 18 if the plan has changed

How Global Investments Can Help

At Global Investments, we advise families on tax-efficient saving and investment for children and grandchildren across multiple jurisdictions. We can help you choose between bare trusts, Junior ISAs, offshore bonds, and other structures, and can coordinate with specialist solicitors where a formal trust deed is required. If your family is internationally mobile, we can advise on how best to structure children's investments to work efficiently across your relevant countries of residence.

This article is for general information only. Tax rules change frequently and the specific treatment depends on individual circumstances. Always seek qualified professional advice before setting up structures for children's investments. Investments can fall as well as rise in value.