Bare trusts for grandchildren: the basic idea explained
Many grandparents want to put money aside for a grandchild’s future. It might be for university, a first home or simply a good start in life. A bare trust is one of the simpler ways this is sometimes done. This article explains the basic idea. It is not advice, and whether a bare trust suits your family depends on many things.
What is a bare trust?
A trust is a way of managing money or property for someone else. There are three roles:
- Settlor: the person who puts assets into the trust, for example a grandparent
- Trustee: the person who holds and manages the assets
- Beneficiary: the person who benefits, for example a grandchild
In a bare trust, the beneficiary has an absolute right to the money. GOV.UK explains that assets in a bare trust are held in the name of a trustee, but the beneficiary has the right to all of the capital and income at any time once they are 18 or over in England and Wales (16 in Scotland). You can read more in GOV.UK’s guide to types of trust.
The key point: it becomes theirs
This is the most important thing to understand. Once money goes into a bare trust, it belongs to the grandchild. You cannot take it back or give it to someone else instead. When they reach 18, they can usually ask for all of it, and spend it however they choose.
For some families that is fine. For others, the idea of an 18-year-old receiving a large sum is a worry. Other types of trust can give trustees more control, but they come with different and often more complex tax rules.
How bare trusts are taxed, in outline
Income Tax
GOV.UK says the beneficiary of a bare trust is responsible for paying tax on income from it. In many cases a child may be able to use their own Personal Allowance. However, GOV.UK also notes that there are special tax rules for trusts set up by parents for their own children. That is one reason why trusts set up by grandparents may be treated differently from trusts set up by parents.
Inheritance Tax
GOV.UK explains that transfers into a bare trust may be exempt from Inheritance Tax as long as the person making the transfer survives for seven years afterwards. In this way, a gift into a bare trust is often treated much like a gift made directly to the grandchild.
Capital Gains Tax
Gains in a bare trust are usually treated as the beneficiary’s gains. The details depend on the assets and the amounts involved.
Tax rules change, and how they apply depends on your circumstances. A qualified professional can explain the position for your family. You can find more detail in GOV.UK’s guide to trusts and taxes.
Who can be the trustee?
The trustee is often a grandparent, a parent or another trusted adult. Trustees have legal duties. They must:
- keep the trust money separate from their own
- invest or hold it sensibly
- keep records
- hand it over to the beneficiary when they are entitled to it
It is wise to think about who would take over if a trustee died or could no longer act.
Does a bare trust need registering?
Some trusts must be registered with HMRC’s Trust Registration Service. The rules on which trusts are included, and which are excluded, are detailed. Ask a professional whether a particular trust needs registering.
Bare trust or something else?
A bare trust is just one option. Depending on what you want to achieve, a professional might also discuss:
- regular gifts from surplus income
- a Junior ISA, which a parent or guardian opens for the child
- a discretionary trust, which gives trustees more say over who benefits and when
- leaving money to grandchildren in your Will, often held in trust until a set age
Each has different rules about control, tax and access. There is no single right answer.
What happens if the grandchild is still young?
While the grandchild is under 18, the trustee manages the money for them. Trustees can usually use it for the grandchild’s benefit, for example towards education. They should keep clear records of any money spent and why. When the grandchild reaches 18, they can ask for whatever is left. Some families talk to the grandchild about the money as they grow up, so it does not come as a surprise.
Questions to ask before setting one up
- Am I comfortable that my grandchild can take the money at 18?
- Can I afford to give this money away for good?
- Who will act as trustee, and who will replace them if needed?
- How will the money be invested?
- How might the gift affect my own Inheritance Tax position?
Where to go from here
Our help articles explain what a trust is, how trusts are taxed and when a trust may need registering.
If you are thinking about a trust for a grandchild, you can read about trust introductions. WillHarbour is an introduction service, not a law firm or tax adviser. We aim to introduce you to up to three appropriately qualified firms, which will explain their fees before you instruct them.
Frequently asked questions
At what age can a grandchild take money from a bare trust?
GOV.UK says the beneficiary of a bare trust has the right to all of the capital and income once they are 18 or over in England and Wales, or 16 or over in Scotland.
Can I take money back out of a bare trust?
Generally, no. Money in a bare trust belongs to the beneficiary. That is why it is important to be sure before setting one up.
Is a gift into a bare trust free of Inheritance Tax?
GOV.UK says transfers into a bare trust may be exempt if the person making the gift survives for seven years afterwards. A professional can explain how this applies to you.
This article is general information about the law in England and Wales and isn’t legal, tax or financial advice. Rules can change, so check official guidance or speak to a qualified professional about your situation.
