Inheritance and trusts for children

①UK IHT basics — what's exempt automatically

Every UK individual has an Inheritance Tax nil-rate-band of £325,000. Estates below this pay no IHT. There's also a Residence Nil-Rate Band of £175,000 if you leave a main home to direct descendants. Together: £500,000 per person, £1,000,000 for a married couple before IHT bites.

Annual gifting exemptions on top of the nil-rate-band:

• £3,000/yr annual exemption (per gifter, not per recipient). Can be carried forward 1 year if unused.
• £250 small gifts exemption per recipient per year (separate from £3k).
• Wedding gifts: £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else.
• Gifts from income (not capital): unlimited, if they're part of your normal expenditure and don't reduce your standard of living.

②The 7-year rule

Larger gifts — above the annual exemptions — are called Potentially Exempt Transfers (PETs). They start out countable against your estate, but:

• If you survive 7 years from the date of the gift, it drops out of your estate entirely
• If you die between years 0–3, full IHT applies (40% of the gift)
• Years 3–7, "taper relief" reduces the IHT progressively

③Bare trust — the simple option

A bare trust (also called an "absolute trust") is the simplest way to gift assets to a child. The settlor (parent or grandparent) transfers ownership; trustees hold the property for the child; the child has an absolute right to the assets at age 18.

• Tax treatment: The income belongs to the child for income tax (subject to the £100 parental rule for parental gifts). Capital gains are the child's.
• IHT: The gift is a PET. 7-year rule applies. After 7 years, exits your estate entirely.
• Control: Trustees manage assets but cannot prevent the child taking control at 18.
• Cost to set up: A simple bare trust deed can be drafted by a solicitor for £200–£500. Off-the-shelf versions are available.

When a bare trust beats a JISA: when the gift exceeds the £9,000/yr JISA limit, when you want investments outside the JISA universe (a specific property share, a family business stake, art), or when you want the gift documented for IHT purposes.

When a bare trust doesn't add much: for routine cash savings under the JISA limit. The JISA already does most of what a bare trust offers and is free.

④Discretionary trust — the staged-release option

A discretionary trust gives trustees full discretion over when, how much, and to whom (within a defined class of beneficiaries) to distribute. The child doesn't have an automatic right at 18 — trustees decide.

Useful when:

• The gift is large (typically £100,000+) and you want staged releases (e.g. £20k at 18, £40k at 25, balance at 30)
• You're worried about a child's judgement, addictions, marital risks, or a creditor situation
• The child has a disability or vulnerability where direct control would be inappropriate
• Multiple grandchildren are beneficiaries and the trustees want flexibility about who gets what

The downsides:

• Tax treatment is harsher. Trust income tax is 45% (39.35% on dividends). Capital gains tax on disposals at higher rates than individuals. A "10-yearly anniversary charge" of up to 6% of the trust value above the nil-rate-band.
• Set-up cost £1,500–£5,000+ for a properly drafted trust deed from a solicitor.
• Annual administration: trustees must file tax returns, hold meetings, document decisions. ~£500–£2,000/yr in ongoing costs.

Rule of thumb: under £100,000 of gifting, a discretionary trust is usually too expensive and complex. Above £250,000, the protection often justifies the costs. Between £100,000 and £250,000 is judgement-call territory.

⑤What most UK families should actually do

Honest framework for typical UK family savings/inheritance planning:

1. Max the JISA (£9,000/yr per child, tax-free, simple)
2. Max the Junior SIPP (£2,880/yr per child, 25% tax-relief uplift, locked until 57)
3. Use annual £3,000 IHT exemption as direct gifts — these are immediately outside your estate
4. Set up regular gifting from income if income comfortably exceeds expenses — unlimited and immediately outside estate
5. For amounts over £50k that exceed JISA caps: consider a bare trust for record-keeping and start the 7-year clock
6. For amounts over £250k or complex family situations: talk to a STEP-qualified solicitor (the Society of Trust and Estate Practitioners) about discretionary trusts. Don't self-build.

Most families never need a discretionary trust. They're marketed harder than they're used.