Under the tax rules that apply to a bare trust for minors, HMRC looks through the trust and taxes the child as if the assets were theirs outright. That means the child’s own £12,570 personal allowance, £3,000 capital gains annual exempt amount, and personal tax rates apply. The one big exception is a gift from a parent: if the income it produces tops £100 in a tax year, all of it is taxed on the parent instead.
Why the Child Is Treated as the Owner
In a bare trust the trustee holds legal title but has no discretion. The child has an immediate, absolute right to both capital and income from the moment the trust is created, and the trustee is essentially a nominee holding the property until the child is old enough to manage it.
Because the beneficial ownership sits with the child from day one, HMRC assesses income, gains, and the value of the assets against the child rather than the trust. That is the source of every tax advantage described below, and also the reason for the anti-avoidance rule that protects it from misuse by parents.
Income Tax
Income arising in the trust is taxed as the child’s. The child can use the full personal allowance of £12,570 before any income tax is due.1GOV.UK. Income Tax Rates and Allowances for Current and Previous Tax Years Most children have little or no other income, so interest and dividends from a modestly funded trust often fall entirely within the tax-free zone.
On top of that, a basic-rate taxpayer has a £1,000 personal savings allowance for bank interest and a £500 dividend allowance for share income. Minors almost always sit in the basic-rate band, so these extra allowances stack on the personal allowance. Where income exceeds the combined thresholds, it is taxed at the child’s own rates rather than at trust rates.
The £100 Parental Settlement Rule
Section 629 of the Income Tax (Trading and Other Income) Act 2005 changes the picture when a parent (or step-parent) funds the trust. If income arising from a parent’s gift exceeds £100 in a tax year, the whole amount is taxed as the parent’s income, not just the excess.2legislation.gov.uk. Income Tax (Trading and Other Income) Act 2005 – Section 629 Once the trust throws off £101 from a parent’s contribution, all £101 is charged at the parent’s marginal rate.3HM Revenue & Customs. Trusts, Settlements and Estates Manual – TSEM4300
The rule bites whether or not the income is actually paid out to the child. It “belongs” to the child under the bare trust structure, and that alone is enough to trigger the charge. A parent can still set one up, but the income tax saving will be minimal unless the capital is small enough to keep annual returns under £100.
Gifts From Grandparents and Others
The parental settlement rule only catches income traceable to a parent’s contribution. Gifts from grandparents, aunts, uncles, or family friends produce income that is taxed as the child’s, whatever the amount. This is why bare trusts funded by grandparents are common in practice. If parental and non-parental money end up in the same trust, keep clear records of the source of each contribution, because HMRC may ask.
Capital Gains Tax
When the trustee sells an asset, the gain is measured against the child’s own CGT position. The child has the full annual exempt amount of £3,000 for the 2025–26 tax year.4GOV.UK. Capital Gains Tax: What You Pay It On, Rates and Allowances Gains within that figure carry no tax.
Above the annual exempt amount, from 6 April 2025 the rates are 18 percent for a basic-rate taxpayer and 24 percent for a higher-rate taxpayer, applied uniformly across asset types including residential property.5GOV.UK. Capital Gains Tax: What You Pay It On, Rates and Allowances – Rates Minors normally have little other taxable income, so most gains fall within the 18 percent band. The trustee handles any required tax return when a disposal occurs, but the liability itself sits with the child.
Inheritance Tax
Putting assets into a bare trust is treated as a potentially exempt transfer (PET). No tax is due at the time of the gift.6legislation.gov.uk. Inheritance Tax Act 1984 – Section 3A That is very different from a gift into a discretionary trust, which can trigger an immediate 20 percent charge on amounts above the nil-rate band. The bare trust gift is treated like a gift to another individual, because the child holds absolute beneficial ownership from the outset.
The Seven-Year Rule
The gift falls out of the settlor’s estate entirely if they survive seven years. Die within that window and the value is added back to the estate and may be charged at up to 40 percent, but only to the extent the estate exceeds the £325,000 nil-rate band.7GOV.UK. Inheritance Tax Thresholds and Interest Rates
Taper relief reduces the effective rate on gifts made between three and seven years before death:8GOV.UK. How Inheritance Tax Works: Thresholds, Rules and Allowances
- 3 to 4 years: 32 percent
- 4 to 5 years: 24 percent
- 5 to 6 years: 16 percent
- 6 to 7 years: 8 percent
- 7 years or more: 0 percent
Taper only matters once the gift itself pushes the estate above the nil-rate band. For many families the nil-rate band absorbs the gift and the taper calculation is academic. For larger transfers the exact date of the gift matters, because a few weeks can shift the applicable rate.
Registering the Trust With HMRC
Most bare trusts have to be registered on HMRC’s Trust Registration Service (TRS), even where there is no tax to pay. There is no blanket exclusion for bare trusts, though some common arrangements may fall within specific exemptions in the regulations.9HM Revenue & Customs. Trust Registration Service Manual – TRSM10030
Non-taxable trusts created after 6 October 2020 must be registered within 90 days. The trustee gives details of the settlor, every trustee, and the child beneficiary, and must update the register when any of those details change. Failing to register or keep it current can attract a penalty of up to £5,000.10HM Revenue & Customs. Register a Trust as a Trustee The top figure is for deliberate non-compliance; an honest oversight will attract less, but not nothing. Registration is free and done online.
What Happens When the Child Turns 18
A bare trust does not last forever. Once the beneficiary reaches 18 (16 in Scotland), they can require the trustee to hand the assets over. The trust has done its job and effectively ends. The former minor is now the outright owner in law as well as in equity.
That is the trade-off. The tax efficiency comes precisely from the child’s absolute entitlement, and the same entitlement means an 18-year-old can take control of the money and spend it however they choose. Nothing inside a bare trust lets the trustee hold funds back for a later age. Families uneasy about that outcome sometimes prefer a discretionary trust, accepting its less favourable tax treatment in exchange for control over the timing of distributions.