Investing on behalf of someone else — a grandchild, a vulnerable relative, or a beneficiary named in a family arrangement — often happens through a General Investment Account held within a trust structure, since ISAs cannot generally be held in trust and Junior ISAs have their own specific rules and limits. Trusts, and bare trusts in particular, offer a flexible way to hold fund investments for another person's benefit, but they come with their own tax rules that differ in some important respects from an ordinary personally held GIA. This article explains how GIAs are used within trust and bare trust arrangements, and the tax considerations that follow.
What a bare trust is and how it differs from other trusts
A bare trust is the simplest form of trust arrangement: a trustee (often a parent, grandparent, or other relative) holds assets, including fund investments in a GIA, on behalf of a named beneficiary who has an absolute, unconditional right to both the capital and any income once they reach age 18 (or 16 in Scotland). Unlike more complex discretionary trusts, where trustees have discretion over how and when to distribute assets among a class of potential beneficiaries, a bare trust involves no such discretion — the beneficiary's entitlement is fixed and guaranteed from the outset.
Why bare trusts are commonly used for children
Bare trusts are frequently used by parents and grandparents wanting to invest for a child's future, such as for university costs or a first home deposit, precisely because of their simplicity: there is no need for a formal trust deed in every case (though one is often still advisable for larger sums or added clarity), and the tax treatment, discussed below, is generally straightforward compared with discretionary trusts.
How a GIA held in a bare trust is taxed
Income and gains are generally taxed as the beneficiary's own
A defining feature of bare trusts is that, for tax purposes, income and capital gains arising within the trust are generally treated as belonging to the beneficiary directly, not to the trustee or to whoever set up the trust (subject to an important exception for parental settlements, covered below). This means the beneficiary's own personal tax allowances — their Personal Allowance, dividend allowance, Personal Savings Allowance, and CGT annual exempt amount — are generally available to be set against the trust's income and gains, which can be a valuable planning point where the beneficiary is a child or other individual with little or no other income.
The parental settlement anti-avoidance rule
A specific and important exception applies where a parent sets up a bare trust for their own minor, unmarried child: if the income generated from the parent's own gifted funds within such a trust exceeds a very low de minimis threshold in a tax year, the entire income is taxed as the parent's own income, not the child's, regardless of the child's own available allowances. This rule exists specifically to prevent parents from sheltering their own investment income from tax simply by routing it through a trust nominally for their child's benefit. Notably, this specific rule does not apply to gifts from grandparents, other relatives, or friends, which is why bare trusts funded by grandparents are often more tax-efficient in practice for a child beneficiary than the same arrangement funded directly by a parent.
Capital Gains Tax treatment
Capital gains realised within a bare trust GIA are generally assessed against the beneficiary's own CGT annual exempt amount (£3,000 for 2025/26) and taxed at the beneficiary's own applicable rate (18% or 24% for investment gains in 2025/26, depending on their tax band) — again subject to the parental settlement rule potentially attributing income, though the CGT treatment for gains specifically has its own particular rules that can differ from the income tax treatment, and checking current guidance for the specific situation is worthwhile.
Comparing a bare trust GIA with other options for investing for a child
| Feature | Bare trust GIA | Junior ISA |
|---|---|---|
| Annual contribution limit | No specific limit (subject to general tax rules) | £9,000 (2025/26) |
| Tax treatment of income/gains | Generally the child's own, subject to parental settlement rule | Entirely tax-free within the wrapper |
| Access on reaching adulthood | Beneficiary gains absolute entitlement at 18 (16 in Scotland) | Automatically becomes the child's own ISA at 18 |
| Flexibility of contributor | Can be funded by parents, grandparents, or others, with different tax consequences depending on the source | Anyone can contribute, subject to the overall annual limit |
Wider (non-bare) trusts and GIAs
Beyond bare trusts, GIAs are also commonly used within discretionary trusts and other more complex trust structures, often set up as part of estate planning or to provide for beneficiaries under conditions the settlor wants to control more actively than a bare trust allows.
Different tax treatment for discretionary trusts
Unlike bare trusts, discretionary trusts are generally taxed in their own right as a separate entity, with trust income and gains taxed at specific trust rates rather than automatically being treated as belonging to any individual beneficiary, and with a much smaller CGT annual exempt amount typically available to the trust compared with an individual. This makes discretionary trusts a considerably more complex tax environment than a bare trust, generally requiring the trustees to complete their own trust tax returns and warranting professional advice given the complexity involved.
Why the distinction between trust types matters before opening a GIA
Before setting up any trust arrangement to hold fund investments, it is important to be clear about which type of trust is actually being created, since the tax consequences differ substantially between a bare trust, where the beneficiary is taxed directly, and a discretionary trust, where the trust itself is generally the taxable entity. This distinction is a matter of legal substance, established by how the trust deed (or, for simpler bare trusts, the practical arrangement) is actually structured, not merely a label chosen for convenience.
Practical administration of a bare trust GIA
Setting up the account
Most major investment platforms allow a GIA to be opened specifically designated as a bare trust for a named beneficiary, with the trustee (typically the parent or grandparent who set it up) managing the account and making investment decisions on the beneficiary's behalf until the beneficiary reaches the relevant age. The platform account is usually opened in the trustee's name but clearly designated for the beneficiary, distinguishing it from the trustee's own personal investments for both administrative and tax reporting purposes.
Reporting obligations
Because income and gains in a bare trust are generally treated as the beneficiary's own, it is usually the beneficiary (or, practically, their parent or guardian while they are a minor) who is responsible for reporting any taxable income or gains via Self Assessment if the relevant thresholds are exceeded, rather than the trustee reporting on a separate trust tax return in the way a discretionary trust would require. Keeping clear records of contributions, income, and gains from the outset makes this reporting considerably more straightforward, particularly if the arrangement continues for many years before the beneficiary reaches adulthood.
What happens at age 18 (or 16 in Scotland)
On reaching the relevant age, the beneficiary gains an absolute legal right to the assets held in the bare trust, and the trustee is generally obliged to transfer control of the account to the beneficiary at that point, or otherwise act on their instructions. This is an important practical consideration for anyone setting up a bare trust: unlike a Junior ISA, where funds simply convert into an adult ISA the child then controls within the same familiar tax-free wrapper, a bare trust GIA hands over full, unrestricted access to a fund investment account, with no ability for the trustee to delay or impose conditions once the beneficiary reaches the qualifying age, since the underlying legal entitlement was already absolute throughout.
A worked example
Suppose a grandparent sets up a bare trust GIA for a 10-year-old grandchild, investing £15,000 in a diversified fund. Over several years, the fund generates modest dividend income each year and eventually produces a capital gain when some units are sold to help fund the grandchild's first year of university costs. Because the grandparent, not a parent, funded the trust, the parental settlement rule does not apply, and the income and gain are assessed against the grandchild's own personal allowances — likely resulting in little or no tax being due, assuming the grandchild has no other significant income or gains in that tax year. Had the same arrangement instead been funded by one of the grandchild's own parents, with income exceeding the low de minimis threshold, the income would instead have been taxed as the parent's own, potentially at a considerably higher rate depending on the parent's own tax position. This is a simplified, hypothetical illustration, and anyone considering a similar arrangement should seek advice tailored to their specific family and financial circumstances.
Key takeaways
- Bare trusts are a common way to hold GIA fund investments for a child or other beneficiary, with the beneficiary having an absolute right to the assets from age 18 (16 in Scotland).
- Income and gains within a bare trust are generally taxed as belonging to the beneficiary, allowing use of the beneficiary's own personal tax allowances.
- A specific anti-avoidance rule taxes trust income as the parent's own where a parent funds a bare trust for their minor child above a low threshold — this rule does not apply to grandparents or other relatives.
- Discretionary trusts are taxed quite differently, generally as a separate entity with their own trust tax rates and a much smaller CGT exempt amount.
- Comparing a bare trust GIA with a Junior ISA involves weighing contribution flexibility against the guaranteed tax-free treatment the JISA wrapper provides.
- Given the complexity and the significant tax differences between trust types, professional advice is generally worthwhile before setting up a trust arrangement for someone else's benefit.