The biggest mistake parents make when setting up a trust fund in the UK is choosing a trust before deciding exactly what they want it to achieve.
A trust is not simply a savings account with extra protection. The structure determines who really owns the assets, how much control trustees have, when a child can demand the money and how tax may apply.
That distinction matters. A bare trust can give the child an absolute entitlement to the assets, while a discretionary trust can give trustees much greater control but introduce additional tax and administration.
HMRC confirms that different types of trust are taxed differently and give beneficiaries different rights. HMRC’s guidance on trust types sets out those distinctions.
For parents, therefore, the first question should not be, “How do I set up a trust fund?” It should be: “Who should control this money, when should my child be able to access it, and what tax and administrative consequences am I prepared to accept?”
Why Choosing the Wrong Trust Can Be Such a Costly Mistake?
Parents often use the phrase “trust fund” as though it describes one standard financial product. Legally and for tax purposes, it does not.
A parent putting money aside for a child might use a bare trust, discretionary trust, interest in possession trust or another arrangement depending on the circumstances.
HMRC specifically explains that a parental trust is not a separate type of trust in itself; it can fall into several different trust categories.
That means two parents can both say they have “put money into trust for their child” while creating very different outcomes.
One arrangement might mean the child becomes absolutely entitled to the money at a particular age. Another may allow trustees to decide whether the child receives anything at 18, 21, 25 or later, depending on the terms of the trust.
The consequences affect four fundamental issues:
- who owns the assets beneficially;
- who controls investment and distributions;
- when the child can demand the money;
- who faces the relevant tax and reporting obligations.
Getting one of these wrong can defeat the reason for establishing the trust in the first place.
Bare Trust or Discretionary Trust: The Difference Parents Must Understand
The distinction between a bare trust and a discretionary trust illustrates why choosing the structure first is dangerous.
| Issue | Bare trust | Discretionary trust |
| Beneficial ownership | Beneficiary is absolutely entitled | Depends on the trust terms and trustee decisions |
| Trustee discretion | Limited | Potentially substantial |
| Child’s access | Generally 18 in England and Wales; 16 in Scotland | No automatic access merely because the beneficiary reaches 18, subject to the deed |
| Choosing beneficiaries | Usually predetermined | Trustees may choose between eligible beneficiaries |
| Tax treatment | Generally follows the beneficiary, subject to parental settlement rules | Separate trust taxation can apply |
| Administration | Often comparatively straightforward | Usually more complex |
HMRC states that under a bare trust, the beneficiary has a right to the capital and income once they reach 18 in England and Wales or 16 in Scotland. Discretionary trustees, by contrast, may be able to decide which beneficiaries receive money, how much is distributed, when payments are made and what conditions apply.
The Access-age Problem
Imagine parents place £80,000 into a bare trust for their five-year-old because they want the money reserved for university fees and, eventually, a house deposit.
They may think they have created a pot that they will continue controlling until their child is 25.
That is not necessarily what a bare trust achieves.
In England and Wales, once the beneficiary reaches 18, HMRC describes them as having the right to the trust capital and income. In Scotland, the corresponding age stated in HMRC guidance is 16.
If the parents’ real objective was to prevent unrestricted access at 18, choosing a bare trust may therefore conflict directly with that objective.
This is why access should be decided before structure.
The Tax Mistake Parents Often Miss
The second major problem is assuming that placing money in a child’s name or into trust automatically shifts the tax liability to the child.
Special rules can apply where a parent provides the assets.
HMRC’s current Self Assessment guidance says that where a parent puts money or property into a settlement for an unmarried minor child and the relevant settlement income exceeds £100, certain income or amounts arising for the child’s benefit can be taxable on the parent. HMRC’s parental settlement guidance explains the rule in detail.
HMRC gives a straightforward example of a parent-funded account held for a minor. Where relevant settlement income from one parent’s settlements does not exceed £100 in the tax year, the settlements legislation does not apply in that year.
The important point is that £100 refers to income, not the amount originally placed into trust.
A parent could therefore put a much larger capital sum into a trust and encounter the parental settlement rules because of the income generated from that capital.
What About Money From Grandparents?
The specific parental settlement rule concerns settlements provided by parents for their minor children. A genuine gift made by a grandparent is therefore not automatically brought within that particular rule simply because the beneficiary is a child.
That does not make a grandparent-funded trust universally tax-free. The trust structure, income, gains, Inheritance Tax position and other circumstances still need to be considered.
Parents should consequently avoid assuming that the tax treatment of a trust is determined solely by the beneficiary’s age or Personal Allowance.
A Trust Is Not Automatically an Inheritance Tax Shortcut
Another common misconception is that moving assets into trust simply removes them from the parent’s estate and starts a straightforward seven-year countdown.
Trust taxation is more complicated.
For many relevant-property trusts, HMRC says transfers are considered alongside the settlor’s available Inheritance Tax threshold and previous chargeable transfers. Its current guidance states that, for most types of trust, transfers exceeding the available £325,000 threshold can create an immediate Inheritance Tax charge. Certain trusts may subsequently face charges at ten-year anniversaries and when relevant property leaves the trust. HMRC’s trust and Inheritance Tax guidance explains how the regime operates.
HMRC currently states that an exit charge on relevant property can be up to 6%, while relevant-property trusts can also be subject to ten-year anniversary calculations.
That does not mean every trust for a child produces an Inheritance Tax bill. Bare trusts and certain special trusts can be treated differently.
It means parents should not choose a trust because somebody has told them that “everything is outside the estate after seven years”.
The type of transfer matters.
So does the type of trust.
So do previous transfers.
And so does whether the parent continues to benefit from the assets.
Parents moving significant property, shares or investments into trust should therefore calculate the tax position before completing the transfer rather than discovering the consequences afterwards.
The same principle applies to a parent’s wider finances. Giving away substantial assets can reduce financial flexibility later in life, so the trust decision should form part of broader retirement tax planning rather than being considered in isolation.
Do Parents Really Want to Give the Money Away?
This is perhaps the most important non-tax question.
Establishing a genuine trust means creating legal rights and obligations. It should not be approached as though the parent is simply moving money between two accounts while keeping complete personal ownership.
Before transferring anything, parents should ask:
Would I Still Make This Gift if My Circumstances Changed?
Suppose parents transfer £100,000 intended for their child’s future home purchase. Five years later, one parent becomes seriously ill, household income falls and the family desperately needs the money.
Whether the parents can simply recover the £100,000 depends on what they created.
A trust should not be established on the assumption that assets can always be taken back whenever the settlor changes their mind.
That is one reason professional trust drafting matters when substantial sums are involved.
The importance of correctly documenting ownership is not theoretical. An unrelated recent trust ownership dispute illustrates how the legal effect and purpose of trust arrangements can become crucial where ownership is later challenged.
Choosing Trustees Is Not Just an Administrative Decision
Parents sometimes spend considerable time deciding what assets to place in trust but only minutes deciding who should manage them.
That reverses the priorities.
The trustees may need to make investment decisions, keep records, deal with tax returns, consider beneficiary requests, interpret the trust deed and make decisions that could affect family relationships for decades.
For a discretionary trust in particular, trustee judgement can be central. HMRC notes that discretionary trustees may decide what is paid, which beneficiary receives it, how frequently payments are made and what conditions are attached.
Parents therefore need to consider whether proposed trustees:
- understand the purpose of the trust;
- can act impartially;
- are likely to remain capable of acting over the required period;
- are comfortable dealing with financial and administrative responsibilities;
- can make difficult decisions if beneficiaries disagree.
Choosing only family members because they are trusted personally may work in some cases. In others, independence or professional expertise may be valuable.
The correct answer depends on the assets, beneficiaries and level of trustee discretion involved.
Registration and Administration Cannot Be Ignored
Setting up the deed and transferring the money is not always the end of the process.
Trusts may have continuing reporting, taxation and record-keeping obligations.
The Trust Registration Service rules are particularly important. Current HMRC guidance distinguishes between trusts that must be registered and excluded express trusts under Schedule 3A. A trust can have registration responsibilities even where its tax position appears relatively simple, depending on the arrangement and applicable exclusions. Parents should use the current Trust Registration Service guidance rather than relying on old articles or assumptions.
HMRC updated this guidance in 2026 following changes affecting the trust registration framework, which makes checking the current position particularly important.
Trustees may also need to consider Income Tax, Capital Gains Tax and Inheritance Tax reporting depending on the trust.
For example, HMRC currently applies separate Income Tax rules to accumulation and discretionary trusts, interest in possession trusts and bare trusts. HMRC’s trust Income Tax guidance explains the distinctions.
A parent who wants a simple investment account for a modest amount should therefore consider whether the expense and administration of a formal trust are proportionate to the objective.
Should Parents Use a Junior ISA Instead?
For some families, the better question is not “Which trust should I use?” but “Do I need a trust at all?”
A Junior ISA can achieve some of the objectives parents associate with a trust without the same trust administration.
For the 2026/27 tax year, the Junior ISA subscription limit is £9,000. Money and investments in the account are held tax-free, the money belongs to the child, the child can take control of the account at 16 and withdrawals are normally available from 18.
That creates an important comparison.
If parents are comfortable with their child having the money outright at 18 and annual contributions fit within the Junior ISA limit, a Junior ISA may provide a simpler route.
If the objective is to hold substantially larger assets, include several potential beneficiaries, impose conditions or retain trustee discretion beyond 18, a trust may serve a purpose that a Junior ISA cannot.
But a Junior ISA does not solve the access problem for parents who want control after the child turns 18. The child owns the money and can withdraw it at that point.
Quick Decision Guide
| Parent’s objective | Structure worth investigating |
| Tax-free long-term saving with access at 18 | Junior ISA |
| Simple outright gift managed while child is young | Bare trust |
| Flexibility over which beneficiaries receive money | Discretionary trust |
| Prevent automatic access at 18 | Consider a suitably drafted discretionary arrangement |
| Significant estate or Inheritance Tax planning | Obtain specialist advice before transferring assets |
This is not a recommendation that any particular structure will be appropriate in an individual case. It shows why the desired outcome should drive the choice.
Three Questions to Answer Before Setting Up the Trust
A useful way to avoid the biggest mistake is to answer three questions in writing before speaking to a provider, solicitor or adviser.
1. When Should the Child Control the Money?
Do you genuinely want the beneficiary to be able to demand everything at 18?
If yes, a simpler structure may be suitable.
If no, do not establish a bare trust merely because it appears easy.
2. Is the Gift Genuinely Irreversible?
Parents should decide whether the money is really being given away or whether they expect to be able to recover it if family circumstances change.
Those are very different objectives.
3. Why is a Trust Better Than the Alternatives?
Possible answers might include controlling access beyond 18, providing for several beneficiaries, protecting a vulnerable beneficiary, holding a particular asset or incorporating the trust into a wider estate plan.
“Because trusts save tax” is not, by itself, a sufficient answer.
The tax outcome depends on the structure and circumstances.
A Practical Example: Two Families, Same £75,000
Consider two hypothetical families. Both want to set aside £75,000 for a child’s future.
Family A wants the child to own the money outright. They are comfortable with access at adulthood and mainly want somebody to manage the investments while the child is young.
A bare trust might therefore deserve consideration, alongside available Junior ISA contributions.
Family B wants the money available for education, medical needs or a first home, but does not want the child automatically receiving the entire fund at 18. They also want flexibility because they may have another child later.
A bare trust could conflict with those objectives. A discretionary trust might better reflect their desired control, although tax, drafting, trustee and administration consequences would need to be assessed.
The amount being invested is identical.
What changes the answer is the intended legal outcome.
That is why searching for the “best trust fund for a child” without defining the objective can lead parents in the wrong direction.
How to Set Up a Trust for a Child More Safely
Parents considering a significant trust should work through the decision in the following order:
- Define the purpose. Decide what the money is for and what situations should permit payment.
- Decide the access age. Establish whether the beneficiary should obtain outright control at adulthood or whether trustee discretion should continue.
- Identify the beneficiaries. Decide whether the trust is exclusively for one child or might need to benefit siblings, grandchildren or others.
- Check the tax before transferring assets. Consider Income Tax, Capital Gains Tax, Inheritance Tax and the parental settlements rules.
- Choose trustees carefully. Consider competence, independence, longevity and the possibility of disagreements.
- Check registration and reporting. Determine whether Trust Registration Service registration or tax returns are required.
- Have the arrangement drafted correctly. Significant or complicated trusts generally justify specialist legal and tax advice rather than relying on generic wording.
The sequence matters. The trust deed should record an already-understood objective rather than determine the family’s financial plan by accident.
Trusts Should Fit the Wider Estate Plan
A trust for children rarely exists in isolation.
Parents should consider their wills, pensions, life insurance, property ownership and other investments at the same time. They should also understand what would happen to remaining personal assets if either parent died.
Where a family is dealing with an estate after death, completely different rules can govern who is permitted to access money. Understanding deceased bank account access can therefore be useful when reviewing the wider distinction between assets owned personally and assets already held through another legal arrangement.
A trust that works perfectly on its own can still create unintended consequences if it conflicts with a will, estate plan or the family’s broader financial position.
When Professional Advice Becomes Particularly Important?
Professional advice becomes increasingly important where:
- substantial investments or property are being transferred;
- parents want to restrict access beyond adulthood;
- the trust has several potential beneficiaries;
- a beneficiary is vulnerable or disabled;
- business shares are involved;
- the parents expect Inheritance Tax planning benefits;
- the settlor or trustees live outside the UK;
- trustees will have wide discretion;
- the parents want the ability to change beneficiaries later;
- an existing trust needs to be altered or wound up.
Trust law and some legal consequences also differ across UK jurisdictions. The age difference HMRC identifies for bare trusts between Scotland and England and Wales is a simple illustration of why parents should not assume that every rule operates identically throughout the UK.
For material sums, paying for advice before the transfer can be considerably easier than trying to correct an unsuitable arrangement afterwards.
Frequently Asked Questions
What is the Biggest Mistake Parents Make When Setting Up a Trust Fund?
The biggest mistake is choosing a trust structure before deciding who should own the assets, who should control them and when the child should receive them. Different trusts produce different legal and tax outcomes, so the family’s objectives should determine the structure rather than the other way around.
What Type of Trust is Best for a Child in the UK?
There is no single best trust for every child. A bare trust may suit an outright gift where eventual access at adulthood is acceptable, whereas a discretionary trust may be more appropriate where trustees need continuing flexibility. The tax and administrative consequences must also be considered.
Can a Child Take Money From a Bare Trust at 18?
In England and Wales, HMRC states that a bare-trust beneficiary aged 18 or over can claim the capital and income; in Scotland, HMRC gives the age as 16. Parents who want control to continue beyond those ages should therefore investigate other structures before establishing a bare trust.
Does Putting Money Into a Child’s Trust Avoid Income Tax?
Not automatically. Where a parent provides money or property for an unmarried child under 18, the parental settlement rules can treat relevant income as the parent’s for tax purposes when the applicable income exceeds £100.
Does the £100 Parental Trust Rule Apply to the Amount Invested?
No. The £100 threshold concerns relevant settlement income, not the original capital contribution. A much larger amount can therefore be placed into an arrangement while the £100 rule remains relevant to the income arising from it.
Does a Trust for a Child Need to Be Registered With HMRC?
It depends on the trust and whether an exclusion applies. The Trust Registration Service rules cover many express trusts but contain specific Schedule 3A exclusions, so trustees should check the current HMRC registration guidance for their particular arrangement.
Is a Junior ISA Better Than a Trust?
A Junior ISA can be better where parents want simple tax-free saving and are comfortable with the child obtaining the money at 18. The 2026/27 Junior ISA allowance is £9,000, and the child can take control at 16 but normally cannot withdraw funds until 18. A trust may offer greater flexibility where those conditions do not meet the family’s objectives.
Can Parents Take Money Back After Putting It Into Trust?
Parents should never assume they can simply reclaim trust assets. Whether anything can be returned depends on the legal structure, trust terms, beneficial ownership and circumstances. Parents who may need the assets themselves should resolve that issue before making the transfer.