Wanting to protect your children's financial future is one of the most thoughtful things a parent or grandparent can do. But every week, solicitors across the UK speak with families who have gone to the trouble of setting up a trust fund in the UK, only to discover it does not work the way they hoped.
Sometimes an unexpected tax bill arrives. Sometimes a large sum passes to an 18-year-old who was never meant to receive it all at once. And sometimes the trust is simply the wrong structure for what the family actually needed.
The encouraging news is that most of these problems are entirely preventable.
In this article, we will discuss the biggest mistakes parents make when setting up a trust fund and how such mistakes can be avoided.
If you require support today, please get in touch with our expert private client team.
Setting up a trust without a clear purpose
When we ask parents what they want a trust to achieve, the answer is often something like "to protect the money" or "to avoid inheritance tax." Those are perfectly reasonable starting points, but neither is specific enough to determine the right structure.
The biggest mistake parents make when setting up a trust fund in the UK is choosing the vehicle before they have defined the destination. A trust is a legal tool, not a ready-made solution. Before exploring your options, it helps to think through four questions:
- What outcome do you actually want? Tax efficiency, protecting a child with additional needs, controlling when money is released, and keeping assets safe from a future divorce all require different approaches.
- Who will manage the money, and are they genuinely equipped to do so for many years.
- What might change over time? Tax law shifts, family circumstances evolve.
- Is a trust the right tool at all? For some families, a well-drafted Will or a Junior ISA may be a simpler and equally effective solution.
Taking the time to answer these questions carefully, ideally with a solicitor, is the single most valuable thing you can do before setting anything up.
Choosing the wrong type of trust
There is no single best approach to how to set up a trust fund for a child in the UK. The right structure depends on your goals, your family’s circumstances, and the age and needs of the people you want to benefit.
Bare trusts
Bare trusts are the most straightforward option when setting up a trust fund for a child. The child has an absolute right to the assets from the outset and gains full control at 18. Income and capital gains are treated as the child's own, which can be tax-efficient.
A bare trust in the UK works well for straightforward gifting, provided you are genuinely comfortable with the money passing to the child at 18.
Discretionary trusts
Discretionary trusts in the UK give trustees flexibility to decide over time who receives income or capital and when. This suits blended families, trust funds for grandchildren, or situations where needs may change unpredictably.
The trade-off is greater tax complexity: there can be an immediate 20% inheritance tax charge on amounts placed into a trust above the nil-rate band, plus 10-year anniversary charges and exit charges when assets are paid out.
Interest in possession trusts
Interest in possession trusts give a beneficiary the right to income during their lifetime while the capital passes to another beneficiary.
This structure is particularly useful for blended families where a surviving spouse needs support, but the settlor wants capital to pass ultimately to children from a previous relationship.
Trusts for disabled or vulnerable beneficiaries
Trusts for disabled or vulnerable beneficiaries qualify for more favourable tax treatment, but the drafting needs to be precise.
A poorly worded trust can unintentionally disqualify a beneficiary from means-tested benefits or forfeit the tax advantages the family was counting on. Court of Protection considerations may also come into play, and this is an area where specialist advice makes a real difference.
Picking the wrong trustees
It is natural to appoint someone you know personally when setting up a trust for a child. But personal reliability does not automatically make someone a suitable trustee for a family trust in the UK.
The role carries genuine legal responsibilities, and the person you appoint may be making important decisions about significant assets for many years. Before settling on anyone, consider their financial understanding, their availability over the long term, their ability to remain impartial, and whether they genuinely understand the commitment involved.
In blended families or where different beneficiaries have competing interests, a trustee who is too closely connected to all parties can find themselves in a very difficult position, and in some cases, trust disputes can arise that are costly and stressful for everyone involved.
As a general rule, appointing at least two trustees is advisable, with clear provisions for replacing them if circumstances change. For larger or more complex trusts, a professional trustee can offer both expertise and continuity.
The Society of Trust and Estate Practitioners (STEP) maintains a directory of qualified professionals.
Misunderstanding the tax position
Many parents set up a trust fund to reduce their expose to inheritance tax, and it can absolutely form part of an effective strategy. But trust funds and inheritance tax interact in ways that catch families off guard.
When asked: “Do you pay tax on a trust fund in the UK?”, the answer, in most cases, is yes, and often more than people expect.
A gift into a discretionary trust above the nil-rate band triggers an immediate 20% IHT charge on the excess. Relevant property trusts also face a 10-year anniversary charge of up to 6% and exit charges on distributions. Even for trusts that qualify as potentially exempt transfers, the 7-year rule still applies.
There is also the "gift with reservation of benefit" rule to be aware of. If you continue to benefit in any way from assets placed into a trust, those assets remain part of your estate for inheritance tax purposes regardless of the structure.
Trusts are also taxed more heavily than individuals on income and gains: income is subject to 45% income tax, and capital gains are taxed mostly
at 24% HMRC's guidance on trusts and taxes sets out the current rules in full.
Drafting problems
A trust set up for a young child might run for 20 or 30 years, and a lot can change in that time. Over-specifying the terms can leave money locked away and unable to help. Restricting funds to university fees, for example, creates a real problem if the child takes a different path entirely. The opposite problem is equally common: a deed so broadly worded that trustees have no real guidance.
The most practical solution is a letter of wishes. This is a separate document explaining the thinking behind the trust without being legally binding on the trustees.
Crucially, it can be updated as your life changes without the formality of amending the deed itself. Because altering a trust deed after signing is difficult and may require court involvement, getting the drafting right at the outset when setting up a trust fund in the UK is incredibly important.
Poorly drafted trusts can also become the source of inheritance disputes further down the line, which is another strong reason to invest in proper legal advice from the start.
Underfunding and neglect
Two quieter mistakes can undermine an otherwise well-structured trust. The first is underfunding: placing a token sum into a trust rarely achieves much.
The second is neglect. A trust is not something you set up once and forget.
Tax law changes, family circumstances shift, and trustees may need replacing.
From April 2026, caps on Business Property Relief and Agricultural Property Relief will change how trust assets are taxed, and from April 2027, unused pension funds will be brought within the scope of IHT for the first time. If your trust was set up before these reforms were announced, it is worth reviewing whether your arrangements still make sense.
How much does it cost to set up a trust fund in the UK, and is a template worth the risk?
How much does it cost to set up a trust fund in the UK?
In the UK, setting up a trust starts from several hundred pounds but can increase depending on complexity.
Online templates may look appealing, but a trust deed is a long-term legal document with real financial consequences. If it is poorly drafted, correcting it can be costly and may require a court application.
Professional fees are considerably less than the cost of unpicking a poorly structured arrangement, and a fraction of a surprise IHT charge.
Should you use a trust at all?
Knowing how to set up a trust fund in the UK is one thing; knowing whether you need one is another. A trust is not the right answer for every family, and a good solicitor will tell you so.
If your main goal is ensuring a modest sum reaches a child in a controlled way, a trust for a child in a Will may achieve exactly that, with considerably less complexity and cost during your lifetime. For straightforward savings, a Junior ISA is tax-efficient and entirely free of legal administration.
A standalone trust tends to make most sense when there are substantial assets involved, a specific concern about how or when they are distributed, a complex family structure, or a beneficiary with particular needs.
Getting it right
Every mistake covered here comes back to the same root cause: choosing a structure before defining a purpose. The families who avoid the biggest mistakes when setting up a trust for a child tend to be the ones who take a step back, think clearly about what they want to achieve, and take proper advice before committing to anything.
How we can help
If you are considering setting up a trust fund in the UK for a child, grandchild, or other family member, our private client team.
at David W Harris & Co Solicitors would be glad to help. We will take the time to understand your situation properly and guide you through your options in plain English.
We work with families across South Wales from our offices in Pontypridd, Swansea, Talbot Green, To arrange a consultation with our team, please get in touch.