FOOL SCHOOL
Trusts For Children

February 2, 2005

It is a good idea to encourage children to take an active interest in their savings and investments and they will normally be able to operate their own bank or building society account from around the age of seven.

However, there are other types of investment which can be suitable for children, which can be legally held on their behalf by adults until they have grown up. The simplest way to do this is to set up a 'bare trust'.

Bare trusts

In a bare trust, savings or investments are registered in your name but you hold them in trust on behalf of your child. Your child is treated as the beneficial owner and the savings or investments are treated as the child's for tax purposes.

To set up a bare trust, where small sums are involved, it is usually sufficient to append the child's initials after your own name when you open a bank account or set up an investment scheme. However, for the avoidance of doubt, it is advisable to complete a 'declaration of trust' form, which a good provider should be able to supply on request, or include a covering letter saying that you are investing on behalf on your child. This will set out your intention to gift the investment to the child. However, if significant sums are involved it's always prudent to seek legal advice. 

If you are setting up a bare trust for your own child and the income from this exceeds £100 a year, then all the income from the trust will be treated as your own and taxed accordingly (there is a £200 exemption if the money comes from both parents). This £100 limit was introduced on 9 March 1999 and applies to any trusts created since this date, plus any new money added to trusts created before this date. Currently, any capital gains are treated as belonging to the child, so that they can use their annual capital gains tax exemption. However, the Inland Revenue is proposing to remove this benefit and a change in this legislation is expected to take place in April 2005.

If anyone else sets up a bare trust for your children (like the child's grandparents for example), then the child's own annual personal allowance for income tax and annual capital gains tax exemption can both be used.

No matter who sets up the bare trust, it counts as a gift for inheritance tax purposes. Basically, this means that it does not count as part of the donor's estate, provided they live for seven years (there are further exemptions for small gifts). 

When the child reaches 18, they will gain full control of the investments subject to the completion of the appropriate paperwork (so, technically, they'll be able to spend the money however they want).

Other types of trust

If you would like to make a gift to a child but do not want them to gain control when they reach 18, you could put the money into another type of trust, such as an accumulation and maintenance trust, where the trustees decide whether or not the beneficiaries receive any income or capital until they are aged 25, and even after that they may hold the capital back. Alternatively, you could use a general discretionary trust for greater flexibility. If you are considering setting up one of these trusts, it's best to get legal advice, as trust law is a fiendishly complex area.

Find out more in our Saving For Children centre.