Investing for children: long-term options for under-18s

Advisers frequently encounter clients seeking to secure a financial future for their children or grandchildren. Whether the goal is to fund university education, assist with a first home purchase, or simply encourage long-term saving, investing on behalf of minors presents unique challenges and opportunities. As such, advisers must consider various tax wrappers and trust arrangements designed to facilitate such investments.

Looking ahead to April 2027, proposed reforms could alter the treatment of pensions on death, with plans to include most pension funds in the deceased’s estate for inheritance tax (IHT) assessment. This marks a departure from the current IHT-free status pensions enjoy and could have major implications for estate planning strategies with many clients now considering passing these funds to the next generation within their lifetime.

This article explores the principal vehicles available for long-term investment on behalf of children under 18. We’ll also address the issue of gifting, where the funds come from, how they are treated for tax purposes, and what implications arise for both the donor and the child.

Understanding the nature of the gift

Before establishing any investment structure, advisers and clients must consider the source of the funds. Most child-focused investment strategies involve a gift, and the tax implications of that gift depend on three key factors:

• the type of gift – cash, shares, or other assets;
• the identity of the donor – parent, grandparent, or other party; and
• the origin of the funds – capital versus surplus income.

Each combination can have differing consequences for IHT, income tax, and capital gains tax (CGT). Advisers should be especially mindful of the parental settlement rules, which can result in investment income being taxed as if it were still the parent’s if the arrangements are not correctly structured.

Cash bank accounts

Parents may choose to hold gifted cash in a standard bank account, in the child’s name, with themselves listed as signatories. This approach is simple but offers minimal return and no tax advantages beyond any personal allowances the child might utilise.

Designated accounts

Some unit trusts and OEICs offer "designated accounts," in which the investment remains in the name of the parent or grandparent but is earmarked for the child. While convenient, these accounts are not formally recognised trusts. The account holder (ie the parent) is the legal and beneficial owner of the funds, and the designee (the child) has no right to any proceeds from the account. As there is no trust involved the parent would be liable for any tax on the investments. For IHT and CGT purposes, the gift of these investments to the child only occurs when they eventually pass into the child’s ownership.

Junior ISAs (JISAs)

Junior ISAs are one of the most tax-efficient ways to invest for a child’s future. These accounts are available to UK-resident children under the age of 18.

Parents can choose from either a cash JISA or a stocks & shares JISA or a combination of the two. A child can only hold one cash ISA and one stocks & shares ISA at any one time.

A child is not eligible to open a JISA if they hold an existing Child Trust Fund (CTF), unless the CTF is transferred in full to the JISA within 60 days, and the CTF is closed.

Structure and eligibility

Only a parent or legal guardian can apply for a JISA on behalf of the child, acting as the registered contact.

The registered contact manages the account and makes all investment decisions until the child turns 18.

Grandparents and other family members can subscribe to the JISA but cannot open or control it unless they have legal parental responsibility.

Subscriptions and tax treatment

The annual JISA subscription limit is currently £9,000. Subscriptions may be made by anyone and are treated as gifts for IHT purposes. As JISAs are tax-exempt accounts, the parental settlement rules do not apply to income or gains generated within a JISA, even if the parent is the donor. This is a key advantage over bare trusts or designated accounts.

If subscriptions are made from the donor's surplus income (and do not affect their standard of living), they may qualify for an exemption from IHT.

Unlike adult ISAs, JISAs can still be subscribed to even if the child becomes non-UK resident after the JISA is opened.

Transition at age 18

When the child turns 18, the JISA converts automatically to an adult ISA. At this point, the new adult account holder can:

• continue investing tax-free;
• withdraw some or all of the funds; and / or
• transfer up to £4,000 into a Lifetime ISA (LISA) each tax year and benefit from the government bonus.

Access restrictions

Funds in a JISA cannot be accessed before age 18 except in exceptional cases such as terminal illness or death. This makes them a strong vehicle for long-term, protected investing. However, the child gains full control of the account when they turn 18 and can choose what they want to do with the funds.

Junior SIPPs

For those aiming to provide for a child’s retirement, a Junior Self-Invested Personal Pension (SIPP) is an attractive option.

Contribution rules

Available to UK-resident children under 18.

Typically, £2,880 net can be paid annually, with basic-rate tax relief grossing the amount up to £3,600.

Higher contributions are possible if the child has taxable earned income.

Like JISAs, anyone can contribute, and contributions are treated as gifts for IHT purposes.

Long-term access

Funds within a Junior SIPP cannot be accessed until the individual reaches the minimum pension age: currently 55, rising to 57 in 2028, and likely to rise further. While this restricts access for many decades, it also means the investment benefits from long-term compounding in a tax-advantaged environment.

Trust-based solutions

Trusts offer flexibility and control over how funds are used and when they become available. They are particularly useful for larger gifts or when control over access is a priority.

Parental settlements and the £100 rule

When parents gift money to their children, they need to be mindful of the parental settlement rules. If a child under 18 receives income exceeding £100 a year from capital gifted by a parent, that income is taxed as if it belongs to the parent. This £100 annual limit applies per parent, per child.

Bare trusts

A bare trust is the simplest form of trust, where the beneficiary is absolutely entitled to the assets and income.

The beneficiaries are fixed and named when the trust is established and cannot be changed later. While it is not possible to add future children or grandchildren to the existing bare trust, separate settlements can be created for their benefit.

As the beneficiary has an absolute entitlement to both the trust capital and any income it generates, the child’s own income tax and CGT allowances apply. This means income and gains may be received tax-free if they fall within these personal allowances. But the parental settlement will apply if the income exceeds £100.

A gift to a bare trust during the donor’s (settlor’s) lifetime is a potentially exempt transfer (PET) for IHT, which means there is no immediate charge to IHT. If the donor dies within seven years of making the gift an IHT charge may become due if it exceeded the nil rate band, currently £325,000, or other exemptions and allowances.

Bare trusts can be particularly attractive for grandparents who wish to maintain some oversight while enabling tax-efficient growth. The child acquires the base cost of investments for CGT purposes, and there is no disposal event when they become entitled at age 18 (or 16 in Scotland).

Access and administration

Trustees may use trust assets for the benefit of the child before they reach majority, subject to any restrictions included in the trust deed. However, once the child reaches the age of entitlement, they can demand access to the capital and any remaining income. At this point, trustees must also ensure the beneficiary is aware of any tax reporting obligations.

Discretionary trusts

A discretionary trust is set up when a donor (or settlor) makes a gift into the trust. Although the donor can express their wishes regarding how the funds should be used, legal control over the assets rests with the trustees. The trustees are granted full discretion over both the income and capital held in the trust, subject to the terms of the trust deed. This means they can decide which beneficiaries receive what amounts, and when, based on changing needs and circumstances.

This flexibility makes discretionary trusts especially useful in situations where funds are required for specific purposes that other savings vehicles cannot accommodate. For instance, a JISA cannot be accessed until the child reaches age 18, which may not align with a family’s desire to fund school fees or other earlier expenses, and the child will have full control over how they spend their money. By contrast, trustees of a discretionary trust can release money at any point they deem appropriate.

There is no automatic right for beneficiaries to access funds at age 18. This allows trustees to delay distributions until they feel a beneficiary is financially responsible or requires access to additional capital for example, for higher education or a first property purchase.

Another key benefit is the ability to name a class of beneficiaries, rather than specifying individuals. For example, grandparents may set up a trust for their grandchildren. If more grandchildren are born after the trust is established, they can still be included without requiring amendments to the trust deed.

Tax considerations

While discretionary trusts offer considerable control, this comes with added tax complexity for the donor, trustees, and beneficiaries.

Tax implications for the donor

When a gift is made into a discretionary trust, it is classed as a chargeable lifetime transfer (CLT) for IHT purposes. On the death of the donor, if total gifts within the previous seven years exceed the nil rate band, and any annual exemptions, an immediate charge to IHT at a rate of 20% will be due.

If assets such as unit trusts or OEICs are transferred into the trust, this may also trigger a CGT liability. However, holdover relief may be available in certain circumstances, allowing the gain to be deferred until the trustees dispose of the assets.

Where a parent establishes a discretionary trust for the benefit of a minor child, income paid out of the trust may be caught by the parental settlement rules, meaning it could be taxed as the parent’s income if it exceeds £100 per year.

Taxation of the trustees

Trustees are responsible for paying tax on income generated within the trust. Once income exceeds the standard rate band of £500 per year, higher trust tax rates apply:

• interest income at 45%; and
• dividend income at 39.35%.

Trusts are also entitled to half the standard CGT annual exemption (currently £3,000), which must be shared between any other trusts set up by the same settlor.

Discretionary trusts are also subject to periodic (every 10 years) and exit charges (when capital is distributed) to IHT, both of which depend on the value of the trust and the amount of nil rate band available.

Taxation of the beneficiaries

When income is paid out to a beneficiary, it is treated as trust income regardless of its source. It comes with a 45% tax credit. Beneficiaries may be able to reclaim part of this tax, depending on their personal tax position, via self-assessment.

Choosing the right option

Selecting the appropriate structure depends on several client-specific factors.

• Objective: is the primary goal IHT mitigation or funding a defined life event?
• Access and control: is unrestricted access at age 18 acceptable, or is extended control desirable?
• Tax efficiency: can the parental settlement rules be avoided? Is there scope to use surplus income?
• Flexibility: how important is the ability to retain investment control or amend beneficiaries?

Investing for minors presents both planning opportunities and tax considerations. Advisers play a key role in aligning clients’ objectives with the appropriate vehicle. Junior ISAs and SIPPs offer straightforward, tax-efficient solutions for long-term accumulation, while trusts provide enhanced control and strategic flexibility.

A considered approach, balancing tax, control, and purpose, enables advisers to support clients in creating meaningful, enduring legacies.