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

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 that looks suitable for “saving money for the children” can produce very different results depending on the beneficiary’s rights, the trustees’ powers and the tax treatment.

For example, a parent may want money protected until their child is 25, only to discover that the structure they chose gives the child an earlier absolute right to the assets.

That is why the purpose should come first and the trust structure second.

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

The main mistake is starting with the trust instead of starting with the outcome.

Before creating anything, parents should be able to answer four basic questions:

• What is the money ultimately for?
• When should the child be able to control it?
• Should trustees decide when money is released?
• What tax and administration could the arrangement create?

HMRC’s official trust guidance explains that trusts can be used to manage money, investments, land or buildings for beneficiaries. The settlor puts assets into the trust, trustees manage them and beneficiaries receive the benefit. Different types of trusts are also taxed differently.

The structure therefore matters from day one.

Choosing the Structure Before Defining the Goal

Consider two parents who each want to put £50,000 aside for their 10-year-old child.

Parent A wants the child to receive the money automatically once legally entitled to it.

Parent B wants trustees to be able to keep managing the money into the child’s twenties, perhaps releasing amounts for university, a first home or other worthwhile purposes.

Those are not the same objective.

A bare trust may suit some arrangements because the beneficiary has an absolute entitlement. GOV.UK states that a beneficiary of a bare trust can demand all the capital and income from age 18 in England and Wales, or 16 in Scotland.

A discretionary trust works differently: trustees have discretion over how and when beneficiaries receive benefits, subject to the trust deed.

So if Parent B casually creates a bare trust while expecting to retain control until 25, the structure may fundamentally conflict with the original goal.

Why Getting the First Decision Wrong Matters?

Choosing an unsuitable trust can affect:

• when the child obtains control;
• who pays tax on income and gains;
• whether trustees can decide between beneficiaries;
• Trust Registration Service obligations;
• Inheritance Tax treatment;
• the ability to respond to changing family circumstances; and
• the amount of ongoing administration required.

The solution is not automatically to choose the most flexible or complicated trust. It is to match the arrangement to the purpose.

10 Common Trust Fund Mistakes Parents Make — and How to Avoid Them

1. Choosing the Wrong Type of Trust

Calling something a “trust fund” does not explain how it actually works.

HMRC recognises several types of trust, including bare trusts, discretionary trusts, interest in possession trusts and accumulation trusts. Their legal and tax consequences can differ.

With a bare trust, the beneficiary has an immediate absolute interest in the assets, even though trustees may manage them while the beneficiary is young.

With a discretionary trust, trustees normally decide how trust income or capital should be applied among the beneficiaries within the powers given by the trust deed.

That distinction can be crucial for parents

How to avoid it: Write down what the trust needs to accomplish before discussing trust types. Include the desired age of access, intended beneficiaries, circumstances in which money should be released and how much discretion trustees should have.

Example: If the main purpose is to give one child £20,000 outright when legally entitled, a relatively simple arrangement may be appropriate. If the purpose is to support several children according to future needs over decades, the same structure may not be suitable.

2. Assuming a Trust Lets Parents Keep Full Control

Parents sometimes think putting money into trust is similar to opening a savings account with extra rules attached.

It is not.

Once assets are properly transferred into a trust, the legal relationships change. Trustees become the legal owners of the trust assets and must administer them according to the trust deed and applicable law. GOV.UK describes trustees as responsible for managing the trust, dealing with its assets according to the settlor’s wishes and paying tax where required.

A parent who is also a trustee still cannot necessarily treat trust money as their personal money.

How to avoid it: Before transferring assets, understand exactly what rights the settlor retains and what powers belong to the trustees.

Ask:

• Can the settlor ever recover the assets?
• Who can change truste
• Can beneficiaries be added or removed?
• Who decides when distributions are made?
• Can the investment strategy be changed?

Do not assume an informal family understanding overrides the legal structure.

Example: A parent places investments into a trust and later needs £15,000 for an unexpected personal expense. They cannot simply assume they can transfer £15,000 back to themselves because they originally supplied the money.

3. Ignoring When the Child Can Access the Money

This is one of the most important practical issues when setting up a trust for children.

With a bare trust, GOV.UK says the beneficiary can generally claim all the capital and income at 18 in England and Wales or 16 in Scotland.

That may be perfectly acceptable if the parents want an outright gift.

It can be a serious mismatch if they imagine trustees will decide whether the beneficiary is financially mature enough at 18.

How to avoid it: Decide the intended access arrangements before selecting the structure.

Consider what you actually mean by “for the child’s future”. Is the money intended for:

• university costs;
• training or starting a career;
• a house deposit;
• starting a business;
• disability or long-term support
• general financial security; or
• an unrestricted gift?

The answer affects how much control and flexibility may be appropriate.

Example: A parent saving £100,000 for a future house deposit might be uncomfortable if the child can instead demand the entire fund and spend it however they choose. That concern should be addressed before the trust is created, not when the child reaches the relevant age.

4. Choosing Trustees Because They Are Family, Not Because They Are Suitable

Choosing trustees can feel personal. Parents commonly turn first to siblings, grandparents or close friends.

Trust and familiarity matter, but they are not enough.

Trustees may need to manage investments, keep records, deal with HMRC, consider distributions, communicate with beneficiaries and make difficult decisions when family members disagree.

They could be carrying that responsibility for many years.

How to avoid it: Choose trustees based on capability as well as personal trust.

A suitable trustee should ideally be:

• dependable;
• willing to undertake the role;
• financially responsible;
• capable of keeping proper records;
• comfortable making impartial decisions;
• likely to remain available for the foreseeable future; and
• willing to obtain professional advice when necessary.

Parents should also think about what happens if a trustee dies, becomes incapacitated, moves overseas or no longer wishes to act.

Where substantial assets, property or business interests are involved, professional trustee involvement may sometimes be worth considering.

5. Assuming a Trust Automatically Avoids Tax

A trust is a legal arrangement, not a universal tax exemption.

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

HMRC states plainly that different trusts are taxed differently.

Inheritance Tax can be especially complex. For relevant property trusts, tax can potentially arise when assets enter the trust, at certain ten-year anniversaries and when relevant property leaves the trust.

For families using trusts as part of succession planning, it is therefore important to consider the trust alongside the wider estate rather than seeing it as a shortcut around tax.

Parents and business owners monitoring the wider environment may also want to keep track of possible inheritance tax changes, while making decisions under the law actually in force rather than on speculation.

How to avoid it: Obtain a tax assessment before transferring significant assets.

Look at:

1. tax when assets enter the trust;
2. tax on income produced by those assets;
3. tax on investment gains;
4. tax when assets leave the trust; and
5. the settlor’s wider estate position.

The correct answer depends on the trust and the assets involved.

6. Missing the Special Tax Rules for Parental Trusts

A particularly important mistake is assuming income produced by money given to a child will always be taxed as the child’s income.

Special rules can apply when a parent provides the assets.

HMRC’s parental trust rules cover trusts created by parents for children under 18 who have never been married or in a civil partnership.

There is also an important £100 rule.

Where the relevant settlement income of a child from settlements made by one parent exceeds £100 in a tax year, HMRC’s settlements legislation can treat that income as the parent’s income. If the threshold is exceeded, it is not simply the amount above £100 that is affected.

Simple example

Assume a mother gives investments to her 12-year-old daughter through an arrangement caught by the parental settlement rules.

If the relevant income attributable to the mother’s settlement is £120 for the tax year, the rule does not mean that only £20 is attributed to the mother. Subject to the detailed rules, the relevant £120 may be treated as the mother’s income.

The £100 rule is applied to relevant income arising from settlements made by each parent, so the source of the assets matters.

HMRC also confirms that this particular £100 savings rule does not apply to money given by grandparents, relatives or friends, or to money inside a Junior ISA or Child Trust Fund.

How to avoid it: Record who contributed each asset and check the tax treatment before assuming a trust shifts taxable income to a child.

7. Forgetting Trust Registration and HMRC Administration

Creating the trust deed is not necessarily the end of the setup process.

The Trust Registration Service can apply even where parents do not expect the trust itself to pay tax.

Under HMRC’s trust registration guidance, UK resident express trusts generally need to register unless a Schedule 3A exclusion applies. Taxable trusts also have registration requirements. The detailed exclusions and deadlines depend on the circumstances.

HMRC’s guidance, updated in July 2026, also warns that failure to register can result in a £5,000 penalty.

Some arrangements are excluded. For example, HMRC currently lists certain trusts established simply to hold money for a child’s bank account among the Schedule 3A exclusions, provided the relevant conditions are satisfied and there is no tax liability requiring registration.

That is precisely why assumptions are risky: “it’s only for my child” does not by itself answer the registration question.

How to avoid it: Check the Trust Registration Service position when the arrangement is created and again when circumstances materially change.

Keep a record of:

• the trust creation date;
• settlor details;
• trustee details;
• beneficiary information;
• assets transferred;
• registration status;
• tax references; and
• important HMRC deadlines.

8.Transferring Assets Without Checking the Immediate Tax Consequences

Parents sometimes focus entirely on what happens years later when the child receives the assets.

The transfer into the trust can itself matter.

HMRC’s Capital Gains Tax guidance states that Capital Gains Tax can potentially arise when assets are put into a trust, taken out of a trust or transferred to a beneficiary.

That becomes especially important when the asset is not cash.

Examples might include:

• shares
• investment funds;
• property;
• valuable business interests; or
• assets that have increased substantially in value since purchase.

Inheritance Tax can also need consideration when assets are transferred into certain trusts.

How to avoid it: Calculate the consequences before signing the transfer documents.

Ask what the asset is worth now, its original acquisition cost, whether it has an unrealised gain, whether any relief could apply and what the Inheritance Tax treatment of the transfer would be.

Once a valuable asset has been transferred, fixing an unexpected tax problem may be considerably harder.

9. Failing to Keep Proper Trust Records

A family trust can last for years or decades. Memories do not.

Poor records become particularly problematic when trustees change, beneficiaries ask questions, tax returns are required or HMRC needs evidence about where assets came from.

Trustees should be able to understand what happened without relying on one family member remembering a conversation from ten years ago.

How to avoid it: Maintain a dedicated trust record from the start.

Depending on the arrangement, this may include:

• the signed trust deed;
• amendments and supplementary deeds;
• details of assets settled
• valuations;
• bank and investment statements;
• trustee meeting notes or resolutions;
• beneficiary distributions;
• tax calculations and returns;
• HMRC correspondence;
• professional advice; and
• documents explaining significant trustee decisions.

This is especially useful where parents and trustees also run businesses, because personal, company and trust assets should not become casually mixed.

If the trust later forms part of wider inheritance administration, families should also understand that trust assets and personally owned estate assets are not necessarily dealt with in the same way. Our guide to deceased bank account rules explains why legal authority over estate money matters after a death.

10. Setting Up the Trust and Never Reviewing It

A trust might be designed when a child is five and still exist when that child is 25 or 35.

A lot can change in between.

The family may have more children. A beneficiary may develop additional needs. Trustees may die or become unsuitable. Investments may grow substantially. Parents may sell a business. Tax legislation may change.

A trust that made sense at the beginning should therefore not simply disappear into a filing cabinet.

How to avoid it: Review the arrangement periodically and whenever something significant happens.

Useful review triggers include:

• the birth of another child;
• marriage or divorce;
• death of a family member;
• a beneficiary developing additional support needs;
• a trustee wishing to retire;
• a major increase in the trust’s value;
• buying or selling property;
• transferring business shares;
• moving overseas; or
• significant changes to tax or trust legislation.

A review does not mean changing the trust every year. It means checking that the arrangement still functions as intended and that trustees are meeting their obligations.

How Can Parents Set Up a Trust More Carefully?

The safest order is goal → structure → tax → documentation → administration, rather than choosing a trust name first.

1. Define the Purpose

Write one clear sentence describing why the trust exists.

For example:

“We want to provide long-term financial support for our two children while allowing trustees to respond to their different needs.”

That objective is much more useful than simply saying, “We want a trust fund.”

2. Decide When Control Should Pass

Think about whether the beneficiary should receive an absolute entitlement at a particular age or whether trustees need continuing discretion.

This is particularly important before choosing a bare trust.

3. Identify the Beneficiaries

Decide whether the trust is for:

• one named child;
• all current children;
• future children;
• grandchildren;
• another family member; or
• a wider class of beneficiaries.

4. Choose Trustees Carefully

Speak to prospective trustees before naming them.

Make sure they understand what the role involves and are prepared to carry it out.

5. Check Tax Before Transferring Assets

Consider Income Tax, Capital Gains Tax and Inheritance Tax where relevant.

Parents should be particularly alert to the £100 parental settlement income rule discussed above.

6. Check Registration Requirements

Do not assume the trust is too small, informal or family-focused to require registration.

Use HMRC’s current Trust Registration Service guidance and check whether an exclusion actually applies.

7. Document the Arrangement Properly

The trust deed should reflect the intended arrangement rather than being treated as generic paperwork.

Poor wording can create problems long after the person who established the trust has forgotten what they originally intended.

8. Schedule Future Reviews

Choose sensible review points and record them.

A review might coincide with major beneficiary ages, tax changes or major financial events.

When Is Professional Advice Worth Considering?

Not every sum set aside for a child requires an elaborate trust structure.

Professional legal and tax advice becomes increasingly valuable when the arrangement involves:

• substantial amounts of money;
• property;
• company shares;
• several beneficiaries;
• children with different needs;
• a family business;
• inheritance planning;
• overseas assets;
• trustees or beneficiaries living abroad;
• complex family relationships; or
• a desire to restrict access beyond the age associated with an outright entitlement.

Parents who own a business should be particularly careful before transferring company shares into trust. The decision can affect voting rights, future sale proceeds, tax, succession and control of the business.

Trust planning should also be considered alongside pensions, wills and other family assets rather than in isolation. For families approaching retirement, understanding pension drawdown planning can help put the trust decision into the wider context of how wealth may be used and eventually passed on.

GOV.UK itself recommends obtaining help from a legal or tax adviser where needed and also points readers towards the Society of Trust and Estate Practitioners.

Is a Trust Fund Always the Best Option for a Child?

No.

The fact that parents want to put money aside for a child does not automatically mean they need a private family trust.

Depending on the purpose, alternatives can include:

• a Junior ISA;
• an ordinary children’s savings account;
• investments held under another appropriate arrangement;
• pension contributions for a child; or
• direct gifts.

The right comparison starts with the same question as the trust itself: what are you trying to achieve?

A parent who simply wants to build a tax-efficient investment pot that the child can access at 18 may have very different requirements from a parent trying to manage substantial family wealth across several generations.

Complexity should solve a real problem.

It should not be the objective.

Conclusion

The biggest mistake parents make when setting up a trust fund in the UK is creating the structure before deciding exactly what the trust needs to do.

That first mistake can lead directly to many others: choosing the wrong type of trust, losing control earlier than expected, selecting unsuitable trustees, misunderstanding tax, overlooking HMRC registration or transferring valuable assets without considering Capital Gains Tax or Inheritance Tax.

The better approach is straightforward. Define the purpose first. Decide when the child should have control. Understand what powers trustees need. Check the tax and registration position before moving assets. Then document and review the arrangement properly.

A trust can be a useful way to manage family assets, but its value comes from choosing a structure that matches the family’s real objective—not simply from having a “trust fund”.

FAQs

What is the best type of trust for a child in the UK?

There is no single best type. A bare trust may suit an outright gift where the child is intended to become absolutely entitled, while a discretionary structure may be more appropriate where trustees need continuing discretion. The right choice depends on access, beneficiaries, tax and the family’s objectives.

Can parents control a child’s trust fund?

It depends on the trust. Parents may act as trustees in some arrangements, but trustees must follow the trust terms and cannot automatically treat trust assets as their own. A beneficiary’s legal rights also depend on the type of trust.

At what age can a child access money held in a bare trust?

According to GOV.UK, a beneficiary can demand the capital and income of a bare trust from age 18 in England and Wales or 16 in Scotland. Different structures can operate differently.

Do parents pay tax on a child’s trust fund?

Sometimes. Special settlement rules can attribute relevant income back to a parent where they provided the assets for an unmarried minor child. Where relevant settlement income from one parent’s settlements exceeds £100 in a tax year, the parental tax rule can apply.

Does every trust need to be registered with HMRC?

No, but many express trusts do. Some trusts qualify for Schedule 3A exclusions, while taxable trusts can have separate registration obligations. Parents should check the current Trust Registration Service rules rather than assuming a family trust is exempt.

Can parents take money back after putting it into trust?

Not automatically. Once assets have been validly transferred, the settlor’s ability to recover them depends on the trust terms and applicable law. Parents should understand this before making an irrevocable transfer.

How much does it cost to set up a trust in the UK?

There is no standard UK price. Costs depend on the type of trust, complexity of the deed, assets involved and whether legal, tax, investment or ongoing trustee advice is required. Obtain a clear quote based on the proposed arrangement rather than choosing a trust solely on setup cost.

Should parents use a solicitor to set up a trust?

Professional advice is particularly sensible for significant assets, property, business shares, several beneficiaries, unusual family circumstances or tax planning. A solicitor or specialist trust adviser can help ensure the legal structure reflects what the parents actually intend.