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Parental Gifts Trust

Also known as: Parent-to-Child Trust, Gift Trust for Children

Definition

A parental gifts trust is any trust arrangement where a parent transfers assets to their unmarried child under 18, subject to special UK tax rules that attribute trust income over £100 annually back to the parent.

Understanding these rules is essential because they significantly limit the income tax advantages parents might expect when creating trusts for minor children.

What Does Parental Gifts Trust Mean?

Parental gifts trusts aren't a separate trust category but refer to any trust structure created by a parent for their minor child. The Income Tax (Trading and Other Income) Act 2005, Section 629 (ITTOIA 2005 s629) establishes "parental settlement rules" to prevent parents from shifting income to children's lower tax rates. These provisions apply only to parents (including stepparents) giving to unmarried children under 18.

The £100 threshold operates as a cliff edge. Under HMRC guidance (TSEM4310), if trust income exceeds £100 annually, all income—not just the excess—is attributed to the parent and taxed at their marginal rate. The £100 applies per parent, per child. Sarah gifts £10,000 shares to a bare trust for her son James, age 14, generating £150 dividends. All £150 is taxed as Sarah's income at her rate—potentially 33.75% dividend tax, resulting in £50.63 tax.

Different trust types interact differently with these rules. Bare trusts are simplest but all income over £100 is attributed to the parent. Discretionary trusts can accumulate income but face trustee tax rates of 45% on amounts over £500. Despite unfavorable income tax treatment, parental gifts trusts offer advantages: asset protection, control, and potential inheritance tax benefits. Gifts into trust are Potentially Exempt Transfers—if the parent survives seven years, assets fall outside their estate.

The most significant exception is the grandparent rule. HMRC guidance (TSEM4300) states "the charge in s629 is only a risk for the parent of the child." Grandparents, aunts, uncles, and other relatives can create trusts without triggering attribution, making grandparent-to-grandchild trusts far more tax-efficient. Grandparents must use their own funds to avoid HMRC challenges.

Common Questions

"What is the £100 rule for parental gifts to children?"

Under UK law (ITTOIA 2005 s629), if a parent's gift to their unmarried child under 18 generates more than £100 income per year, all the income (not just the excess) is taxed as the parent's income. The £100 limit applies per parent, per child—so each parent can have separate trusts assessed independently.

"Can grandparents avoid the parental gifts trust tax rules?"

Yes, the parental settlement rules only apply to parents (and stepparents) giving gifts to their own children. Grandparents, aunts, uncles, and other family members can give gifts to children without triggering these rules, making grandparent-to-grandchild trusts far more tax-efficient.

"What type of trust should parents use for gifts to children?"

Parents can use bare trusts, discretionary trusts, or interest in possession trusts. Bare trusts are simplest but all income over £100 is attributed to the parent. Discretionary trusts offer more control and can accumulate income but face higher trustee tax rates of 45% on income over £500.

Common Misconceptions

Myth: If my child's trust earns £150, only the £50 over £100 is taxed as my income.

Reality: If trust income exceeds the £100 threshold, all the income—the entire £150—is attributed to the parent and taxed at their marginal rate, not just the excess. The £100 operates as a cliff edge. HMRC guidance (TSEM4310) confirms this all-or-nothing application.

Myth: Setting up a trust for my children will always save inheritance tax.

Reality: While trusts can offer IHT advantages—gifts are Potentially Exempt Transfers if you survive seven years—parental gifts trusts don't save income tax if income exceeds £100. If you retain any benefit from trust assets ("reservation of benefit"), assets remain in your estate for IHT. Trusts are useful for control and asset protection, not automatic tax shelters.

  • Trust for Children: The broader term—parental gifts trusts are a specific type created by parents, whereas trusts for children can be created by anyone.
  • Bare Trust: The most common structural type for parental gifts, where the child has absolute entitlement at 18.
  • Lifetime Gifts: Alternative mechanism where parents make direct gifts instead of using trusts, avoiding complexity but losing control and protection.
  • Inheritance Tax: While parental gifts trusts face unfavorable income tax treatment, they can still offer IHT advantages as Potentially Exempt Transfers.
  • Income Tax Rules: The broader tax framework within which parental gifts trust attribution rules operate as anti-avoidance provisions.

Need Help with Your Will?

Understanding parental gifts trusts is crucial when planning for your children's financial future. Knowing these tax rules helps you decide whether a trust is right for your family.

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Legal Disclaimer:

This article provides general information only and does not constitute legal or financial advice. WUHLD is not a law firm and does not provide legal advice. Laws and guidance change and their application depends on your circumstances. For advice about your situation, consult a qualified solicitor or regulated professional. Unless stated otherwise, information relates to England and Wales.