Trust vs Direct Gift: Which Is Best for Passing Wealth to Children?

Passing wealth to the next generation is a goal shared by most affluent families. The question is not whether to transfer wealth — it is how, and when. The options range from a simple direct gift (transfer assets outright and walk away) to a fully structured discretionary trust with professional trustees and a deed running to dozens of pages.

Neither is inherently better. The right choice depends on the amount, the age of the intended recipient, the nature of the assets, and how much control you want to retain after the transfer. This guide sets out the options clearly.

Option 1: The Outright Direct Gift

The simplest option is to give assets directly to a child (or other beneficiary) with no conditions attached.

Inheritance Tax Treatment (IHT)

An outright gift to an individual is a Potentially Exempt Transfer (PET) for UK IHT purposes. This means:

• If you survive seven years from the date of the gift, it falls outside your estate entirely for IHT.
• If you die within seven years, the gift is brought back into your estate (in whole or on a tapered basis if you survive three to seven years — "taper relief").

There is no immediate IHT charge on a PET. The risk is entirely on the seven-year clock.

Income Tax and CGT on the Gift

The gift itself does not trigger income tax for the recipient. However, if you give an asset that has increased in value (shares, property, investment funds), you are treated as having disposed of it at market value for CGT purposes — meaning you crystallise any unrealised gain at the point of transfer.

For example, if you gift shares worth £50,000 that you originally bought for £10,000, you have a capital gain of £40,000, taxed (at your marginal rate, after the annual exempt amount) regardless of the fact that no cash has changed hands.

Control After the Gift

Once you give an asset outright, you have no control over what the recipient does with it. They can spend it, invest it badly, lose it in a divorce settlement, or give it away. If your child is young, financially inexperienced, or involved in a precarious marriage, an outright gift may transfer the asset only to see it dissipated.

Income from Gifted Assets: Parental Settlement Rules

If you give income-producing assets (shares paying dividends, savings accounts) to your minor child (under 18 and unmarried), the income continues to be taxed as yours if it exceeds £100 per year. This is the "parental settlement" anti-avoidance rule. It does not apply to gifts from grandparents.

Option 2: A Bare Trust

A bare trust holds assets in the name of a trustee but for the absolute benefit of a named beneficiary. The beneficiary has an immediate, fixed, and unconditional right to the assets and any income arising from them.

From a legal perspective, a bare trust is still treated as an outright gift for almost all purposes:

• IHT: treated as a PET, like an outright gift. Seven-year clock applies.
• CGT on transfer: you dispose of assets at market value when placing them in trust (same as an outright gift).
• Income: the income is treated as the beneficiary's income (useful for minor children if the settlor is not the parent — grandparent gifts work well here for income splitting).
• Control: minimal. The trustee holds the legal title, but the beneficiary can demand transfer of the assets when they turn 18. You cannot prevent them from accessing the money at 18.

A bare trust is useful when:

• You want to gift to a minor and have a trustee manage the assets until the child turns 18.
• The beneficiary is under 18 and cannot directly hold certain investments.
• You are a grandparent wanting to pass wealth to grandchildren in a tax-efficient way, taking advantage of their lower (or nil) income tax rate.

Option 3: A Discretionary Trust

A discretionary trust holds assets for a class of beneficiaries (typically named children and potentially their descendants), with the trustees having full discretion over who receives income, who receives capital, and when. No beneficiary has an automatic entitlement to anything — the trustees decide.

IHT Treatment of Discretionary Trusts

This is where discretionary trusts differ fundamentally from outright gifts and bare trusts. Transfers into a discretionary trust are Chargeable Lifetime Transfers (CLTs) — not PETs. This means:

• If the value transferred exceeds the nil rate band (£325,000), IHT at 20% is charged on entry (the "entry charge").
• Every ten years, a "periodic charge" of up to 6% applies to the trust's value above the nil rate band.
• When assets leave the trust (are appointed to beneficiaries), an "exit charge" at a proportionate rate applies, calculated based on the time since the last periodic charge.

These are known collectively as the "relevant property" charges. They represent an ongoing cost of using a discretionary trust, which must be weighed against the benefits.

However, if the transfer into trust is within the nil rate band (£325,000 per person, or up to £650,000 for a couple using both allowances), the entry charge is nil. Careful planning around the nil rate band can allow significant sums to be placed in trust without immediate IHT cost.

The Benefits of a Discretionary Trust

Control: the trustees (which may include you as one of multiple trustees, though not the only trustee) decide when and to whom income and capital are distributed. Assets are not automatically handed to a child at 18 — distributions can be timed for maturity, need, or favourable tax circumstances (for example, when a beneficiary is a student with no income, receiving a distribution at a nil or low tax rate).

Flexibility: the trust can be adapted over time. If one child develops health issues, the trustees can favour them. If a child divorces, the trust assets are generally outside the divorce settlement (unlike outright gifts).

Asset protection: trust assets are generally protected from the personal creditors of beneficiaries (if properly structured and not a sham).

IHT efficiency: assets grow inside the trust and, subject to the ten-year periodic charges, do not form part of any individual's estate. Over time, this can result in significant IHT savings compared to assets sitting in the estate.

Professional Trustees

Discretionary trusts often benefit from having a professional trustee (a solicitor, trust company, or chartered accountant) alongside lay trustees. The professional brings expertise in trust administration, investment oversight, and compliance with trustee duties. The cost — typically a percentage of trust assets annually — must be factored in.

Choosing Between the Options

The right structure depends on:

• Amount: for smaller gifts (under the annual exemption, or structured within the nil rate band), simplicity is usually better. For large sums, trust structures become more relevant.
• Age of the beneficiary: very young children may benefit from a trust structure that delays unfettered access. Mature adult children may be trusted with outright gifts.
• Your desire to retain control: if you want to influence how and when assets are distributed, a discretionary trust is the only structure that allows this after the gift is made.
• Income vs capital assets: income-producing assets in a discretionary trust are taxed at the trust income tax rate (45% on most income, 39.35% on dividends, above a £500 standard rate band) — higher than most individuals would pay. For income-producing assets, outright gifts (to beneficiaries who pay lower tax rates) may be more efficient.
• Estate planning timeline: if you are in good health and under 70, a PET strategy (outright gifts, seven-year clock running) is straightforward. If you are older or in uncertain health, a CLT (trust) that removes value immediately but incurs the entry charge may be preferable.

Compliance Note

Trust and gift tax rules are among the most complex in the UK tax system. IHT, CGT, income tax, and trust law interact in ways that make every case highly individual. The rules described in this article reflect the position as of 2026 and are subject to change — particularly given recent consultations and proposed reforms to the IHT treatment of trusts. This article is for general educational purposes only and does not constitute legal or tax advice. You must take professional advice before establishing a trust or making significant gifts, particularly if your estate is substantial.

How Global Investments Can Help

Wealth transfer planning across generations is one of the most consequential financial decisions a family makes. Our advisers work with estate planning specialists to help clients choose the right structures, understand the tax implications, and document intentions clearly. For internationally mobile clients, cross-border trust and gift planning adds an additional layer of complexity that requires specialist input. Contact our team to begin a conversation about your family's wealth transfer goals.