The Biggest Mistake Parents Make When Setting Up a Trust Fund in the UK 

Setting up a trust can be an effective way for parents to hold money, investments or other assets for a child.

But the biggest mistake parents make when setting up a trust fund in the UK is choosing the trust structure before deciding exactly what they want the money to achieve. 

A parent may say that the money is “for the child’s future”, but that does not answer the important legal questions. 

Should the child automatically control the money at 18? Should trustees decide when money is released? Should other children be able to benefit?

Is the money intended for education, a house deposit or long-term financial support? Who will manage it if the parents die? What happens if family circumstances change? 

These questions should be answered before substantial assets are transferred.

A trust is not simply a savings account with additional protection.

It is a legal arrangement involving a settlor who provides assets, trustees who manage them and beneficiaries who can benefit from them.

Different trust structures can produce very different consequences for ownership, control and tax. 

The fundamental rule for parents is therefore: 

Decide the outcome first. Choose the trust second. Transfer the assets third.

What Is the Biggest Mistake Parents Make When Setting Up a Trust Fund?

The biggest mistake is starting with the words “trust fund” rather than starting with the purpose. 

For example, parents might want to save £100,000 for their child’s first home at age 25. 

They set up a bare trust because it appears simple. 

The problem is that a beneficiary of a bare trust generally has an absolute entitlement to the trust’s capital and income.

GOV.UK states that the beneficiary can normally demand the assets from age 18 in England and Wales or age 16 in Scotland. 

The parents cannot simply decide later that 18 is too young and postpone access to 25. 

A discretionary trust works differently. Trustees can potentially decide which eligible beneficiaries receive money, how much they receive and when distributions are made, subject to the trust deed. 

However, greater control comes with greater administration and potentially much less favourable tax treatment. 

Neither structure is automatically better. 

The correct structure is the one that actually matches the family’s objectives. 

Bare Trust vs Discretionary Trust: Why the Difference Matters

Parents commonly encounter bare and discretionary trusts when looking at ways of holding assets for children. 

The distinction illustrates why parents should not choose a trust solely because it appears easy or because somebody else in the family uses the same arrangement. 

1. Choosing a Bare Trust Without Realising the Child Can Demand the Money

This remains one of the most important mistakes. 

Imagine parents invest £80,000 for a seven-year-old child. 

Their intention is that the money should eventually help with: 

• A House Deposit 
• University Costs 
• Professional Training 
• Starting A Business 

They assume they can decide when the child is financially mature enough to receive it. 

But if the arrangement is a bare trust, their intentions do not override the beneficiary’s legal rights. 

Once the beneficiary reaches the relevant age, the trustees cannot normally continue withholding the assets simply because they believe the beneficiary should wait. 

Parents wanting genuine discretion beyond that age need to consider whether a different structure is required before creating the arrangement. 

What If the Bare Trust Already Exists?

Parents should not immediately transfer the money somewhere else. 

They should first: 

• Review The Trust Deed 
• Confirm Who Beneficially Owns The Assets 
• Establish What Rights The Child Already Has 
• Stop Making Large New Contributions If The Structure Is Unsuitable 
• Check The Tax Consequences Of Any Proposed Transfer 
• Obtain Appropriate Legal Advice Before Trying To Restructure It 

Moving assets out of an unsuitable trust without understanding the existing ownership can create a second problem rather than solving the first. 

2. Assuming a Trust Automatically Saves Tax

A trust does not automatically mean less tax. 

Depending on the trust, Income Tax, Capital Gains Tax and Inheritance Tax can all become relevant. 

For the 2026/27 tax year, trustees of accumulation and discretionary trusts generally pay 45% Income Tax on most trust income and 39.35% on dividend-type income.

A tax-free amount of up to £500 can apply, although it can be divided where the settlor has created multiple qualifying trusts. 

Most trustees also have a £1,500 Capital Gains Tax annual exempt amount for 2026/27, with trustee gains generally taxed at 24%. 

Relevant-property trusts can also face Inheritance Tax charges. 

Potential charges can arise: 

• When Assets Enter Certain Trusts 
• At Ten-Year Anniversaries 
• When Relevant Property Leaves The Trust 

HMRC confirms that ten-year anniversary and exit charges can reach a maximum rate of 6%, depending on the circumstances. 

Parents therefore should not create a discretionary trust simply because somebody has told them that trusts “avoid inheritance tax”. 

The real tax position can be considerably more complicated. 

Families carrying out wider estate planning should also be aware that the treatment of pensions on death is changing.

Most unused pension funds are due to enter the estate for IHT purposes from April 2027, which is covered separately in the inherited pensions tax rules from April 2027. 

3. Missing the £100 Parental Income Rule

This is particularly important where parents provide investments or money for a minor child. 

Where relevant settlement income derived from property provided by one parent exceeds £100 during a tax year, the parental settlement rules can result in the whole relevant amount, rather than merely the part over £100, being treated as that parent’s income for Income Tax purposes. 

HMRC also confirms that the £100 limit applies separately to each parent. 

For example, suppose a father gives investments to his 12-year-old daughter through a relevant arrangement and they generate £350 of income. 

It would be wrong simply to assume that the £350 automatically uses the daughter’s Personal Allowance because the investments belong beneficially to her. 

The parental settlement rules must first be considered. 

Parents and Grandparents Are Not Necessarily Treated the Same

The source of the money matters. 

The specific parental settlement rule concerns settlements made by a parent for their unmarried minor child.

A genuine gift made by a grandparent does not automatically become the parents’ income under that same rule merely because the beneficiary is their child. 

However, this does not mean grandparent-funded trusts are automatically tax-free. The ordinary tax rules applying to the beneficiary and the particular trust remain relevant. 

Parents should therefore keep clear evidence showing who actually provided each contribution. 

4. Creating the Trust but Failing to Transfer the Assets Properly

A trust deed and the assets intended for the trust are two separate considerations. 

Signing documentation does not necessarily mean every intended asset has automatically become trust property. 

Depending on the arrangement, parents may also need to ensure that: 

• Cash Is Actually Transferred 

• Investments Are Correctly Registered Or Documented 

• Property Transfer Formalities Are Completed 

• Ownership Records Match The Trust Arrangement 

• Additional Contributions Are Properly Recorded 

For example, parents might sign documents stating that an investment portfolio is intended for their child but continue operating everything exactly as personal property. 

Years later, it may be unclear whether particular investments ever became trust assets. 

The opposite problem can occur as well. Parents may transfer an asset without properly recording the legal terms on which it is being held. 

Documentation and ownership therefore need to agree. 

Large investments, shares and property are particularly poor areas for informal arrangements. 

5. Choosing Trustees Because They Are Relatives Rather Than Because They Are Suitable

Being trustworthy in everyday family life does not automatically make somebody a suitable trustee. 

Trustees can potentially remain responsible for substantial assets for decades. 

They may have to: 

• Interpret The Trust Deed 
• Make Distribution Decisions 
• Maintain Records 
• Deal With Tax 
• Manage Investments 
• Resolve Conflicts Between Beneficiaries 
• Work With Other Trustees 
• Deal With HMRC 
• Explain Decisions Years Later 

A sibling or close friend may be completely honest but uncomfortable dealing with investments, tax returns or disagreements involving £500,000. 

Parents should consider ability as well as personal trust. 

It is also sensible to consider what happens if a trustee: 

• Dies 
• Becomes Incapable 
• Moves Abroad 
• No Longer Wants The Role 
• Falls Out With Another Trustee 
• Develops A Conflict Of Interest 

The trust deed should contain workable provisions for future trustee changes. 

6. Treating the Trust as Something That Never Needs Reviewing

Creating the trust is the beginning rather than the end. 

Family circumstances change. Tax law changes. Investments change. Trustees age. Beneficiaries develop different financial needs. 

Investment management is particularly important. 

In England and Wales, the Trustee Act 2000 requires trustees exercising relevant investment powers to consider factors including the suitability of investments and appropriate diversification.

Trustees must also review trust investments from time to time and consider whether they should be changed. 

That means putting money into one investment and ignoring it for 15 years is not necessarily appropriate trustee administration. 

A sensible review can consider: 

• Whether Investments Remain Suitable 
• Whether The Portfolio Is Appropriately Diversified 
• Whether Risk Matches The Trust’s Objectives 
• Whether Beneficiary Needs Have Changed 
• Whether Trustees Remain Appropriate 
• Whether Tax Rules Have Changed 
• Whether Trust Records Are Complete 
• Whether TRS Details Need Updating 

The appropriate frequency depends on the circumstances, but the trust should not simply disappear into a filing cabinet. 

7. Making the Trust Deed Too Rigid

Parents sometimes try to predict every decision their child will make over the next 20 years. 

For example, the trust may be drafted around the assumption that money will be used specifically for university. 

But the beneficiary may instead: 

• Start A Business 
• Enter An Apprenticeship 
• Buy A Home 
• Need Medical Or Disability Support 
• Become Financially Independent Without Attending University 

Extremely rigid drafting can produce problems when real life develops differently. 

There is also an opposite risk: drafting a trust so broadly that trustees receive almost no guidance about how parents expected them to exercise their discretion. 

This is where a letter of wishes can be valuable. 

A letter of wishes can explain the settlor’s intentions and priorities while remaining separate from the legally binding trust deed. Specialist trust practitioners commonly use it as guidance for discretionary trustees. 

It can address matters such as: 

• Education 
• Housing 
• Business Funding 
• Financial Maturity 
• Emergency Support 
• Treatment Of Different Beneficiaries 
• Circumstances In Which Larger Payments May Be Appropriate 

A letter of wishes is generally not a substitute for getting the trust deed right, and it is not normally legally binding in the same way. 

Parents cannot use it to override a beneficiary’s absolute rights under a bare trust. 

8. Assuming Trust Registration Is Only Necessary When Tax Is Due

That assumption can be wrong. 

The Trust Registration Service regime extends beyond trusts that currently owe tax, although exemptions apply. 

HMRC’s current guidance states that registrable non-taxable express trusts generally have 90 days from becoming registrable to complete registration.

HMRC’s 2026 trust registration checker also warns that failing to register can potentially result in a £5,000 penalty. 

This area also changed during 2026 following amendments to the anti-money-laundering regulations, so parents should be particularly cautious about relying on an old article or checklist. 

The exact registration position depends on: 

• The Type Of Trust 
• When It Was Created 
• Whether It Is Taxable 
• Whether An Exemption Applies 
• Where The Trustees Are Resident 
• The Assets Held 
• Changes To The Trust 

Trustees should check the current HMRC rules rather than assuming that “no tax due” automatically means “no registration required”. 

9. Mixing Trust Money With Personal Money

Poor record keeping can create serious problems even where the trust itself was correctly drafted. 

Trust assets should remain clearly identifiable. 

Problems arise where parents: 

• Move Trust Money Through Everyday Personal Accounts 
• Withdraw Cash Without Recording Its Purpose 
• Pay Personal Expenses From Trust Funds 
• Make Investments Without Recording Beneficial Ownership 
• Reimburse Themselves Without Supporting Evidence 

Imagine a trustee transfers £12,000 from a trust investment account into their current account. 

Ten years later another trustee asks what happened to it. 

Was it used for the child’s school fees? Was it a trustee expense? Was it transferred into another investment? Was it borrowed? Was it simply taken? 

Without records, proving the answer becomes difficult. 

Trustees should keep an audit trail including relevant: 

• Bank Statements 
• Investment Records 
• Invoices 
• Receipts 
• Trustee Decisions 
• Tax Returns 
• HMRC Correspondence 
• Distribution Records 

Good administration protects both the beneficiary and the trustees. 

10. Trying to Rewrite the Trust Informally Later

Trust deeds are not ordinary family agreements. 

Parents cannot safely assume that everybody agreeing around the kitchen table changes the legal rights created by the trust. 

Whether an existing trust can be varied depends on matters including: 

• The Trust Deed 
• Beneficiary Rights 
• Beneficiary Ages 
• Legal Capacity 
• Trustee Powers 
• Applicable Jurisdiction 
• Tax Consequences 

A bare-trust beneficiary who has already acquired an absolute beneficial interest cannot simply have that ownership taken away because their parents have changed their minds. 

Certain trusts may contain powers allowing appointments or other changes. Other variations can require beneficiary consent or, in some circumstances, court involvement. 

The legal and tax position should therefore be established before changing an existing arrangement. 

Trust Fund, Child Trust Fund and Junior ISA Are Not the Same Thing

The terminology causes confusion. 

A private family trust is a legal arrangement under which trustees hold or manage assets for beneficiaries. 

A Child Trust Fund is a specific tax-free savings product for eligible people born between 1 September 2002 and 2 January 2011. The scheme is closed to new accounts. 

A Junior ISA is a different tax-free children’s savings account. 

During 2026/27, up to £9,000 can be contributed to Junior ISAs for a child. The money belongs to the child. They can generally take control of the account at 16 but cannot normally withdraw the money until 18. 

Parents therefore need to establish which arrangement they actually need rather than using the phrase “trust fund” for every form of children’s saving. 

Is a Trust Better Than a Junior ISA?

Not necessarily. 

For straightforward long-term saving where parents are comfortable with the child receiving the money at 18, a Junior ISA can be considerably simpler. 

A trust becomes more relevant where the family wants arrangements that a conventional children’s savings account cannot provide. 

Examples might include substantial family wealth, several potential beneficiaries, continuing trustee discretion or more complicated succession planning. 

Lifetime Trust or Trust Created Through a Will?

Parents should also distinguish between setting up a trust now and creating one through their will. 

A lifetime trust starts while the settlor is alive. 

A will trust generally arises following death according to the terms of the will. 

The tax, ownership and administrative consequences can differ significantly. 

A family whose main objective is simply to prevent a young child from inheriting a large estate immediately following the parents’ death may not necessarily need to transfer substantial assets into a lifetime trust today. 

A properly drafted will may instead contain the required trust provisions. 

This is another reason the objective should be established before the product or legal structure is chosen. 

What Should Parents Do If They Think Their Trust Has Been Set Up Incorrectly?

Parents should avoid making a rushed second transaction. 

A practical review can follow this order: 

The critical point is to understand the existing position before trying to fix it. 

A Realistic Example of How Parents Can Get It Wrong

Suppose two parents want to invest £150,000 for their daughter. 

She is five years old. 

Their objective is to provide a house deposit at around age 25. 

They create a bare trust and invest the £150,000. 

Over the following years the portfolio grows. 

The parents believe they remain in control because they are the trustees. 

When their daughter approaches adulthood, they discover that the beneficial ownership created by the bare trust does not work the way they assumed. 

They cannot simply write a new letter saying: 

“The money is now locked away until age 25.” 

Nor should they automatically transfer the portfolio into a new discretionary trust. 

Instead, they need to establish: 

• Their Daughter’s Existing Beneficial Rights 
• Whether Any Proposed Transfer Constitutes A Disposal 
• The Income Tax Position 
• The Capital Gains Tax Position 
• Any Inheritance Tax Consequences 
• Whether The Trust Was Correctly Registered 
• Whether Future Contributions Should Go Somewhere Else 

The original mistake was not necessarily choosing a bare trust. 

A bare trust may be perfectly suitable for an outright gift. 

The mistake was choosing it without understanding what rights it gave the beneficiary. 

Questions Parents Should Answer Before Setting Up Any Trust

Before substantial assets move, parents should be able to answer the following questions. 

What Is the Money For? 

“Helping the children” is too broad. 

Define whether the objective is an outright gift, education, housing, long-term support, inheritance planning or something else. 

Who Should Benefit? 

Is there one child or several potential beneficiaries? 

Should future children or grandchildren be included? 

When Should They Receive the Money? 

If the parents would be uncomfortable with an 18-year-old controlling the whole fund, that needs to be addressed before choosing a bare trust. 

Who Should Make Decisions? 

Trustees must be capable of managing the arrangement for potentially many years. 

Who Is Providing the Money? 

This can be important for tax, particularly because the £100 parental settlement rule applies specifically in relation to parental provision for minor children. 

What Tax Could Apply? 

Consider Income Tax, Capital Gains Tax and Inheritance Tax before transferring substantial assets. 

Does the Trust Need to Be Registered? 

TRS requirements should be checked under the current rules. 

How Will the Assets Actually Enter the Trust? 

Signing documentation is only part of establishing a workable arrangement. Ownership and records need to reflect the trust as well. 

What Happens If Circumstances Change? 

A good structure should consider trustee death, additional beneficiaries, changes in family circumstances and future administration. 

Can Parents Cancel a Trust Fund?

Sometimes a trust can be brought to an end, but parents cannot assume they can cancel it simply because they supplied the money. 

Once assets have been transferred and beneficial rights created, those rights can belong to somebody else. 

Whether a trust can be terminated depends on: 

• The Type Of Trust 
• The Deed 
• Beneficiary Rights 
• Trustee Powers 
• Beneficiary Capacity 
• The Assets 
• The Applicable UK Jurisdiction 
• Tax Consequences 

Closing a Trust Registration Service record is also not the same thing as legally terminating the trust. 

The underlying legal position needs to be dealt with first. 

Final Thoughts

The biggest mistake parents make when setting up a trust fund in the UK is creating the legal structure before defining the result they actually want. 

That one mistake can lead to many others. 

Parents can unintentionally give a child unrestricted access earlier than expected, create unnecessary tax liabilities, appoint unsuitable trustees, fail to transfer assets correctly or discover years later that the trust cannot simply be rewritten. 

The safest sequence is: 

Purpose → Beneficiaries → Access → Trustees → Trust Type → Tax → Asset Transfer → Registration → Ongoing Review

A trust can be extremely useful where the family genuinely needs the control or flexibility it provides. 

But it should not be created merely because a trust sounds more protective or tax-efficient than an ordinary savings or investment account. 

The legal rights created by the trust deed matter more than the parents’ informal intentions. 

For substantial assets, property, complicated family circumstances or long-term discretionary arrangements, specialist legal and tax advice before the transfer takes place can be considerably easier than trying to repair the arrangement years later. 

Frequently Asked Questions

What is the biggest mistake parents make when setting up a trust fund?

The biggest mistake is choosing a trust before defining who should benefit, when they should receive the assets, how much control trustees should retain and what tax consequences the structure creates. 

At what age does a child receive money from a bare trust?

A beneficiary can generally demand the assets from age 18 in England and Wales or age 16 in Scotland. 

Can parents stop a child taking bare-trust money at 18?

Generally, parents cannot simply postpone an absolutely entitled beneficiary’s legal rights because they now believe the child should receive the assets later. 

Does putting money into a trust avoid Inheritance Tax?

Not automatically. Certain trusts can themselves create lifetime, ten-year anniversary and exit-charge considerations for Inheritance Tax. 

What is the £100 rule for children’s trust income?

Where relevant settlement income arising from property provided by one parent for an unmarried minor child exceeds £100 in a tax year, the relevant income can be treated as that parent’s income for Income Tax purposes. The £100 limit applies separately to each parent. 

Can grandparents contribute to a trust for grandchildren?

Yes, subject to the trust terms. The specific parental £100 settlement rule does not automatically apply to a genuine grandparent-funded gift in the same way, although other trust and beneficiary tax rules can still apply. 

Is a Junior ISA better than a trust fund?

For straightforward tax-free saving where access at 18 is acceptable, a Junior ISA may be simpler. A trust may be more appropriate where the family requires bespoke beneficiary or trustee arrangements. 

How much can be paid into a Junior ISA in 2026/27?

The Junior ISA subscription limit is £9,000 for the 2026/27 tax year. 

Does every family trust have to register with HMRC?

No. Registration depends on the type of trust, tax position and available exemptions. However, many registrable trusts that do not owe tax can still fall within the Trust Registration Service rules. 

Do parents need a solicitor to create a trust?

A solicitor is not legally required for every possible trust arrangement, but specialist advice is particularly valuable where substantial assets, investments, property, discretionary provisions or complex beneficiary arrangements are involved. 

Disclaimer: This article provides general information about UK trusts and taxation and does not constitute personalised legal, tax or financial advice. Trust law differs between England and Wales, Scotland and Northern Ireland, and tax treatment depends on individual circumstances.