Which is better for a child, a bare trust or a discretionary trust?

A bare trust gives the child the right to everything in it at 18, or 16 in Scotland, and its income and gains are taxed as the child's.

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A discretionary trust leaves the trustees to decide who gets what and when. It pays income tax and capital gains tax at trust rates, and inheritance tax when money goes in, every ten years and when money comes out.

The advisers for this subject: Sunny Bharj and Tony Springer

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How a bare trust is taxed

Income tax: The income is the child's, and the child can set their own Personal Allowance against it. The trusts' £500 tax-free amount does not apply. Where the money came from a parent and produces more than £100 of income in a year, all of it is taxed as that parent's.
Capital gains tax: Anything the trustees do is treated as done by the child, so gains are the child's. There is no tax when the trustees hand the assets to the child.
Inheritance tax: A gift into a bare trust for a child is a potentially exempt transfer. It leaves your estate if you survive seven years, and the money then counts as part of the child's estate.
Age of entitlement: The child can call for all the capital and income at 18 in England and Wales, or 16 in Scotland.

How a discretionary trust is taxed

Income tax: Most trusts pay no income tax where their income for the year is £500 or less, or £100 where the settlor has set up five or more trusts. Above that, tax is due on all of the income: 39.35% on dividends and 45% on the rest.
Capital gains tax: Trustees pay 24% on gains. Their annual exempt amount for 2026/27 is £1,500, or £3,000 where the beneficiary is a disabled person or a child whose parent has died.
The entry charge: Inheritance tax of 20% is due on the amount by which a transfer into the trust, added to chargeable transfers in the previous seven years, exceeds £325,000. If you die within seven years your estate pays inheritance tax on the transfer at 40%.
The ten-yearly charge: On each tenth anniversary of the trust, inheritance tax of up to 6% of the value of the trust's assets.
Exit charges: Up to 6% on assets paid out of the trust between anniversaries.

Trusts outside the ten-yearly charge

The entry, ten-yearly and exit charges apply to relevant property, which covers discretionary trusts and most other trusts set up since 22 March 2006. Bare trusts are outside them.

So are a trust for a bereaved minor and an 18 to 25 trust, which can only be set up under the will of a parent who has died or under the intestacy rules, and a trust for a disabled person. What happens if I die without a will?

Giving money into any trust while keeping a benefit from it, such as giving away a house you go on living in, is a gift with reservation of benefit. The 20% charge is due and the gift still counts as part of your estate.

Under a bare trust the child can take everything in it at 18 in England and Wales, and at 16 in Scotland.

Where this fits

We can set the tax on each type against the amount you plan to put in and the age you want the child to have it.

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The advisers for this subject

Sunny Bharj

Independent Financial Adviser

Tony Springer

Independent Financial Adviser

Advising through Equity & General Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority. Check the firm on the FCA register under number 474163.