Trusts for Children and Grandchildren: A Practical Guide to Structures and Tax

Passing wealth to children and grandchildren involves a series of competing considerations: tax efficiency, control, protection from potential future creditors or relationship breakdown, and the practical question of when and how beneficiaries should receive assets. Trusts offer flexibility that direct gifts cannot provide — but they come with compliance obligations and tax charges that require careful planning.

Why Use a Trust for Younger Beneficiaries?

A direct gift to a minor child in the UK does not actually pass legal ownership — a child cannot hold legal title to most assets. In practice, gifts to minors sit in a "bare trust" (see below) until the child reaches 18.

More importantly, many families are uncomfortable with the idea of an 18-year-old receiving unrestricted access to significant capital. A trust allows the settlor (the person establishing the trust) to specify conditions — for example, access at 25, or income during life with capital access after a specified age — and to give trustees (who administer the trust) discretion over how and when to distribute assets.

Bare Trusts

A bare trust is the simplest form. The beneficiary has an absolute, unconditional right to the trust assets. Trustees hold the assets in name only — they have no discretion. The beneficiary receives the assets at age 18 as of right (the age of legal capacity in England and Wales).

Tax treatment: For income tax and capital gains tax purposes, a bare trust is transparent — the income and gains are taxed as if they belonged directly to the beneficiary. For a minor beneficiary with no other income, this can be tax-efficient: the child's personal income tax allowance (£12,570 in 2026) shelters the first £12,570 of income, and the capital gains annual exempt amount (£3,000 in 2026) shelters gains.

The parental settlement rule: If the assets in a bare trust were provided by a parent (rather than a grandparent, aunt/uncle, or other family member), any income above £100 per year is taxed on the parent at the parent's marginal rate, not the child's. This significantly limits the tax efficiency of bare trusts funded by parents for their own children (but not for grandparents gifting to grandchildren).

Discretionary Trusts

A discretionary trust gives the trustees full discretion over how income and capital are distributed among a class of beneficiaries. The settlor typically specifies a class (e.g., "my children and grandchildren and their descendants") but does not specify amounts or timing. Trustees then exercise their judgment — informed by a "letter of wishes" from the settlor — about who should receive distributions and when.

This flexibility is the key advantage: if circumstances change (a beneficiary goes through a divorce, develops financial difficulties, or simply does not need the money), the trustees can adapt. They can also accumulate income within the trust for later distribution.

Tax treatment: Discretionary trusts face a specific tax regime:

• Entry charge: If assets transferred to the trust exceed the settlor's available nil rate band (£325,000 in 2026), the excess faces an immediate IHT charge of 20%.
• Ten-year anniversary charge: Every ten years, the trust faces an IHT charge of up to 6% of the trust's value above the NRB at the time. In practice, for a £500,000 trust, this could be around £10,500 every ten years — manageable but worth factoring in.
• Exit charge: When assets leave the trust (by distribution to a beneficiary), a pro-rata exit charge applies — calculated as a fraction of the last 10-year charge, depending on how long after the anniversary the distribution occurs.
• Income tax: Discretionary trusts pay income tax at 45% on most trust income above £500 (the first £500 is taxed at the standard rates applicable to the income type). Beneficiaries who receive distributions can reclaim the excess tax paid at trust level against their own lower tax rate.
• CGT: The annual exempt amount for trusts is half the individual amount — £1,500 in 2026. CGT within discretionary trusts is paid at trust rates.

Despite the complexity, discretionary trusts remain popular because the flexibility they provide — particularly for long-term family wealth planning across multiple generations — is difficult to replicate through other structures.

Accumulation and Maintenance Trusts: Historical Context

Prior to the Finance Act 2006, Accumulation and Maintenance (A&M) trusts offered a preferential tax regime for trusts that provided income for maintenance and education of beneficiaries who would receive capital at a specified age. These trusts were a common vehicle for grandparents funding grandchildren's education.

The 2006 HMRC reforms abolished the beneficial treatment of A&M trusts, bringing them within the general discretionary trust regime (entry charge, 10-year charge, exit charge) unless the trust was modified by 6 April 2008. Historic A&M trusts that were amended on time retained some advantages; new trusts no longer benefit from the old regime.

This is primarily relevant for reviewing historic trusts that may have been set up before 2006 and checking whether they were properly updated.

Junior ISA (JISA) Within a Trust Context

A Junior Individual Savings Account (JISA) is a straightforward, tax-efficient savings wrapper for children under 18. The annual subscription limit is £9,000 in 2026. All growth and income within a JISA is free of UK income tax and CGT.

JISAs cannot be held by a trust — they must be held in the child's own name. However, a bare trust arrangement may be used to manage JISA contributions on behalf of a minor. JISAs convert to adult ISAs automatically when the child turns 18.

For grandparents who want simple, tax-efficient savings for grandchildren without IHT or trust complexity, JISA contributions (up to £9,000 per year per child) are an accessible starting point, particularly given that the parental settlement rule does not apply to grandparents' contributions.

SIPP for Children

A Self-Invested Personal Pension (SIPP) can be established for a child of any age. Contributions are limited to £2,880 per year net — the pension tax relief mechanism tops this up to £3,600 gross from HMRC.

The critical feature: once the contribution is made, it is locked in the pension until the minimum pension access age (currently 55, rising to 57 from 6 April 2028). But the compound growth over a 50-year investment horizon from a childhood contribution is substantial.

Grandparents or parents can contribute on behalf of a child without the funds being subject to the parental settlement rule, as the money goes into a pension rather than generating immediate income in the child's name.

Note: pension IHT rules are changing from April 2027. Pension funds will be subject to IHT in estates from that date. For very young beneficiaries, this long-term horizon makes pension planning more complex.

Trust Registration Service (TRS)

HMRC's Trust Registration Service (TRS) requires most UK express trusts — including bare trusts — to register on the TRS portal, regardless of whether the trust has any UK tax liability. Registration is typically required within 90 days of trust creation.

The information required includes details of the settlor, trustees, and beneficial owners (beneficiaries). The TRS is not publicly accessible in full, but some information is accessible to law enforcement and certain other bodies.

Failure to register a registrable trust is a compliance breach subject to penalties. This is an area where professional assistance in setting up and administering trusts is strongly advisable.

Child Tax and Benefit Implications

Trust distributions to children (where they exceed the child's own income levels) may interact with child benefit calculations and means-testing for other purposes. This is a relatively niche concern for high-net-worth families but worth understanding in the context of the wider household financial picture.

Practical Guidance for Families

1. Match the trust type to your objectives. Certainty of outcome for the beneficiary? Consider a bare trust. Maximum flexibility? A discretionary trust.
2. Consider the IHT entry charge. For large gifts, use the available nil rate band and/or spread contributions across years.
3. Draft a letter of wishes. Trustees cannot be bound, but a well-drafted letter provides essential guidance.
4. Register the trust correctly. TRS compliance is mandatory; get professional assistance.
5. Review regularly. Family circumstances change; trustees should review the trust's investment policy and distribution decisions regularly.

How Global Investments Can Help

Establishing and administering trusts for children and grandchildren involves co-ordinated legal, tax, and investment management expertise. Global Investments works with families to design trust structures appropriate to their objectives, ensure correct setup and registration, and manage the investment mandate within the trust efficiently and tax-consciously.

We work alongside specialist trust lawyers and tax advisers to provide a fully joined-up service for families planning wealth transfer to the next generation.

Tax rules are subject to change. Trust taxation is complex and this article contains a summary only. Always take qualified legal and tax advice before establishing a trust or making significant financial decisions in this area.