Setting up a trust can be an effective way for parents to hold money, investments or other assets for their children.
However, the biggest mistake parents make when setting up a trust fund in the UK is choosing or funding a trust before fully understanding what legal rights the child will have, who will control the assets and how the trust will be taxed.
A trust is not simply a savings account with extra protection.It is a legal arrangement involving a settlor, who puts assets into the trust, trustees, who manage those assets, and beneficiaries, who are entitled to benefit from them. Different types of trusts create very different legal and tax consequences.
Once money or property has been transferred into a properly constituted trust, parents cannot necessarily change their minds and take it back. That makes getting the structure right before transferring substantial assets particularly important.
What Is the Biggest Trust Fund Mistake Parents Make?
The most significant mistake is creating the wrong type of trust for what the family is actually trying to achieve.
For example, parents might establish a bare trust because it appears straightforward but later discover that the beneficiary becomes absolutely entitled to the capital and income once they reach the relevant age.
GOV.UK explains that a beneficiary of a bare trust can demand the assets once they are 18 in England and Wales or 16 in Scotland. The trustees cannot simply decide that the child should wait until 21, 25 or 30 because the parents have subsequently changed their minds.
A discretionary trust works differently because trustees generally have greater discretion over which beneficiaries receive money and when. However, discretionary trusts can also involve more complicated administration, Income Tax and Inheritance Tax considerations.
The correct trust therefore depends on what the parents are trying to achieve rather than simply which arrangement appears easiest to establish.
Most Common Trust Fund Mistakes and How Parents May Recover
1. Choosing a Bare Trust Without Understanding When the Child Gets the Money
Bare trusts are commonly used to hold investments or money for children because they are relatively straightforward.
However, parents sometimes assume that because they are trustees, they can decide indefinitely when the beneficiary receives the money.
That is not normally how a bare trust works.
The beneficiary ultimately has an absolute entitlement to the trust’s capital and income. GOV.UK states that this right can be exercised from age 18 in England and Wales and age 16 in Scotland.
Imagine parents establish a £100,000 investment portfolio for their six-year-old child. Their intention is that the money should eventually help with a house deposit at 25.
If the arrangement is a bare trust, simply writing down “we would prefer the money to be used at 25” does not necessarily postpone the beneficiary’s legal entitlement.
How Can Parents Recover?:
First, they should stop adding significant new assets until the trust deed and legal position have been reviewed.
Existing assets should not simply be moved into another trust because doing so could involve a disposal, transfer of beneficial ownership or tax consequences.
If the child already has an absolute beneficial interest, converting the arrangement into a discretionary trust may not be straightforward.
The practical solution may therefore be to:
- Review The Original Trust Deed
- Confirm The Beneficiary’s Existing Rights
- Stop Additional Contributions If The Structure Is Unsuitable
- Use A Different Structure For Future Family Wealth
- Obtain Legal Advice Before Altering Existing Assets
2. Setting Up a Trust for Tax Reasons Without Understanding the Tax Rules
Another major mistake is assuming that putting money into a trust automatically reduces tax.
It does not.
Different trusts are taxed differently. Depending on the circumstances, trusts can create Income Tax, Capital Gains Tax and Inheritance Tax obligations.
Discretionary and other relevant-property trusts can also fall within the Inheritance Tax regime.
HMRC guidance explains that relevant-property trusts can potentially face charges at ten-year anniversaries and when property leaves the trust. Exit charges can be up to 6%.
Transfers into certain discretionary trusts can also result in an immediate lifetime Inheritance Tax charge where the relevant thresholds and circumstances are met.
How Can Parents Recover?:
Do not attempt to unwind transactions purely to avoid an unexpected tax bill.
Instead:
- Identify exactly what type of trust exists.
- Establish when each asset entered the trust.
- Calculate the original value and current value.
- Review previous lifetime gifts made by the settlor.
- Check whether Income Tax, CGT or IHT returns should have been filed.
- Correct previous reporting where necessary.
- Obtain advice before making further distributions or transfers.
Trust tax problems are usually easier to resolve when discovered voluntarily rather than ignored.
3. Missing the £100 Parental Trust Income Rule
This is one of the easiest rules for parents to overlook.
Where a parent gives assets to an unmarried minor child and income arising under the relevant settlement exceeds £100 in a tax year, special settlement rules can result in the income being treated as the parent’s for Income Tax purposes.
HMRC’s 2026 guidance confirms that where relevant settlement income for a parent’s minor child exceeds £100, the parent can become taxable on that income.
The £100 rule concerns income, rather than simply the amount originally contributed.
Example:
Suppose a parent puts £15,000 into investments held for their 10-year-old child.
Those investments generate £600 of relevant income during the tax year.
It would be incorrect simply to assume that the £600 must always be taxed as the child’s income because the investments are held for the child.
The parental settlement rules must also be considered.
How Can Parents Recover?:
Parents who believe this rule was missed should reconstruct the trust’s annual income records and determine whether tax was reported correctly.
Where previous tax returns are wrong, professional advice may be appropriate about correcting the position with HMRC.
4. Choosing Trustees Because They Are Family Rather Than Because They Are Suitable
A trustee has genuine legal and administrative responsibilities.
Yet parents sometimes appoint someone simply because they are a sibling, grandparent or close friend.
A better question is whether that person can:
- Understand The Trust Deed
- Keep Accurate Financial Records
- Deal With HMRC Requirements
- Make Impartial Decisions
- Manage Investments Responsibly
- Continue Acting For Many Years
- Handle Potential Family Disagreements
HMRC guidance makes clear that trustees can have responsibilities including registration, tax returns and providing beneficiaries with information concerning trust income and tax.
How Can Parents Recover From Choosing the Wrong Trustee?:
Start by reviewing the trust deed because it may contain specific provisions allowing trustees to retire, be removed or be replaced.
In England and Wales, section 36 of the Trustee Act 1925 also contains statutory provisions concerning the appointment of new or additional trustees in particular circumstances.
The procedure should be completed formally. Simply agreeing within the family that someone is “no longer a trustee” may not be sufficient.
Different rules can apply in Scotland and Northern Ireland, so jurisdiction-specific legal advice may be necessary.
5. Failing to Register the Trust With HMRC
Another common mistake is assuming that a trust only has to be registered if it owes tax.
The Trust Registration Service rules are broader than that, although exemptions exist and the precise requirements depend on the trust.
HMRC says trusts that become registrable generally need to meet the applicable registration deadlines, with many registrable trusts subject to a 90-day deadline.
The Trust Registration Service rules were also affected by regulatory changes introduced in 2026, making it particularly important to check the current HMRC requirements rather than relying on older articles or advice.
How Can Parents Recover?:
Trustees should first check whether the trust is required to register.
If registration was missed, they should address it promptly rather than assuming that being late means nothing can now be done.
Where a registered trust’s details have changed, HMRC’s online service can also be used to maintain and update trust information.
6. Mixing Trust Money With the Parents’ Own Money
Trust money should be clearly identifiable.
Problems can develop when parents move trust money through personal accounts, pay family expenses from trust assets or fail to document why payments were made.
Years later, nobody may be able to establish whether a withdrawal represented:
- A legitimate payment for the beneficiary;
- A trustee expense;
- An investment;
- A loan;
- An unauthorised personal withdrawal.
How Can Parents Recover?:
Reconstruct the records as far as possible using:
- Bank Statements
- Investment Statements
- Trust Accounts
- Receipts
- Tax Returns
- Trustee Meeting Records
- Correspondence With Advisers
Future transactions should then be kept clearly separate and documented.
7. Trying to Change the Trust Informally After It Has Been Created
A parent may discover five years later that the trust no longer suits the family and decide simply to rewrite a clause.
That can be dangerous.
Whether a trust can be changed depends on its terms, the beneficiaries’ rights, the powers available to trustees and the applicable law.
In England and Wales, courts also have powers in certain circumstances under the Variation of Trusts Act 1958 to approve variations involving particular beneficiary interests.
That does not mean parents have a general right to rewrite any trust whenever they want.
How Can Parents Recover?:
A solicitor should establish whether the proposed change can be achieved through:
- A power already contained in the deed;
- An appointment or distribution;
- Consent from beneficiaries who are legally capable of giving it;
- Replacement of trustees;
- A legally valid variation;
- Court approval where required.
Tax consequences should be checked before executing the change.
8. Assuming a Trust Fund and a Child Trust Fund Are the Same Thing
The terminology causes considerable confusion.
A private family trust is a legal structure for holding assets for beneficiaries.
A Child Trust Fund, by contrast, is a specific government-backed tax-free savings account. The scheme applied to eligible children born between 1 September 2002 and 2 January 2011 and is now closed to new accounts.
Junior ISAs are generally the current tax-free children’s savings alternative.
Parents should therefore establish which product or legal arrangement they actually have before making decisions about it.
What Should Parents Do If They Think Their Trust Has Been Set Up Incorrectly?
A trust problem is usually best dealt with methodically.
| Step | What to do |
| 1. Find The Documents | Locate the trust deed, amendments, letters of wishes and investment records |
| 2. Stop Making Changes | Avoid withdrawals, transfers or major new contributions until the position is understood |
| 3. Identify The Trust Type | Determine whether it is bare, discretionary, interest in possession or another structure |
| 4. Check Beneficiary Rights | Establish who legally owns or can demand the assets |
| 5. Review HMRC Compliance | Check TRS registration, Income Tax, CGT and IHT obligations |
| 6. Review Trustees | Confirm that all trustees are properly appointed and willing to act |
| 7. Correct Records | Reconstruct missing transactions and accounts |
| 8. Obtain Advice Before Variation | Establish whether the deed can legally be amended, appointed out or otherwise reorganised |
The most important action is usually not to make another transaction until the original position is understood.
Moving money out of an incorrectly structured trust can potentially create a second legal or tax problem rather than fixing the first one.
Can Parents Cancel a Trust Fund in the UK?
Sometimes, but not simply because they have changed their minds.
Whether a trust can be terminated depends on factors including:
- The type of trust;
- The wording of the deed;
- The beneficiaries and their rights;
- Their ages and legal capacity;
- The trustees’ powers;
- The assets involved;
- The applicable UK jurisdiction;
- Potential tax consequences.
For example, where a beneficiary already owns the beneficial interest under a bare trust, the parent generally cannot simply reclaim that beneficial ownership.
Similarly, closing the Trust Registration Service record is an administrative step; it does not itself make an existing legal trust disappear. HMRC says trustees should ensure the trust information is correct before reporting that a trust has closed.
A Realistic Example of a Trust Fund Mistake
Consider parents who want to save £150,000 for their daughter’s future.
They establish what they believe is a simple trust when she is five and invest the money.
Their intention is:
“She should receive the money when she is 25 and financially responsible.”
Twelve years later they discover that the arrangement is actually a bare trust.
Their daughter may therefore acquire the right to control the assets much earlier than the parents intended under the rules applying to that jurisdiction.
Trying to move the £150,000 into a new discretionary trust at that stage could create additional legal and tax questions because the parents may no longer beneficially own the assets.
The better response would generally be to:
- Review the original deed;
- Confirm the daughter’s legal entitlement;
- Stop adding additional money;
- Review any outstanding tax and TRS requirements;
- Obtain advice before moving existing assets;
- Establish an appropriate structure for any future gifts.
The mistake was not necessarily using a bare trust.
The mistake was using a bare trust without understanding what a bare trust meant.
How Can Parents Avoid Trust Fund Problems From the Beginning?
Before establishing a trust, parents should be able to answer four questions clearly:
Who Should Ultimately Receive the Money?
The beneficiaries must be identified clearly.
When Should They Receive It?
Parents who want genuine flexibility beyond age 18 need to understand whether their proposed structure can actually provide it.
Who Should Control It?
Trustees should be selected for competence, reliability and independence rather than merely convenience.
What Are the Tax Consequences?
Income Tax, Capital Gains Tax, Inheritance Tax and Trust Registration Service requirements should be considered before substantial assets are transferred.
Final Thoughts
The biggest mistake parents make when setting up a trust fund in the UK is setting up the legal structure first and asking what it actually does afterwards.
A trust can be extremely useful, but the words written into the trust deed and the type of beneficial interest created matter far more than what the parents informally intended.
Common problems include choosing the wrong trust, misunderstanding when the child gains control, overlooking the £100 parental income rule, failing to consider Inheritance Tax, appointing unsuitable trustees and missing HMRC registration requirements.
Many administrative mistakes can be corrected. Trustees can update records, deal with missed registration, correct tax reporting and, in appropriate circumstances, change trustees.
Changing the underlying beneficial rights can be much harder.
For that reason, parents who discover a potentially serious mistake should normally stop making further contributions, locate the original trust documents and obtain legal and tax advice before attempting to move or withdraw the assets.
FAQs
Is a trust fund better than a Junior ISA for a child?
It depends on the family’s goals. A Junior ISA is simpler and tax-free, while a trust may offer more flexibility over beneficiaries, assets and how money is managed.
How much money should parents put into a trust fund?
There is no fixed minimum or ideal amount. Parents should consider affordability, tax implications and whether the trust structure is appropriate before transferring substantial assets.
Can grandparents contribute to a child’s trust fund?
Yes, grandparents can usually contribute, but the tax treatment may differ from contributions made by parents. The trust terms should also permit additional contributions.
Does a child pay tax on money received from a trust?
Potentially. The tax treatment depends on the type of trust, the nature of the income or capital received and the beneficiary’s individual tax circumstances.
Do parents need a solicitor to set up a trust fund?
A solicitor is not always legally required, but professional advice can be valuable where significant money, property, investments or complex beneficiary arrangements are involved.