Bare Trusts & Investing for your Kids

Using a Bare Trust Between Parents and Child to Maximise the Small Gift Exemption in Ireland

In Ireland, a bare trust is a simple and tax-efficient way for parents to transfer wealth to their child while retaining control over the assets until the child reaches adulthood. One of the key benefits of a bare trust is that it allows parents to use the Small Gift Exemption to transfer funds to their child tax-free, helping to build a financial foundation for their future.

 

What Is a Bare Trust?

A bare trust is a legal arrangement where a trustee (usually a parent) holds assets on behalf of a beneficiary (the child). However, unlike other trust structures, the child has an absolute right to the assets and any income they generate. The parents manage the assets until the child turns 18, at which point the child gains full control over the funds.

 

The Small Gift Exemption

The Small Gift Exemption allows any individual to gift up to €3,000 per year to another person without incurring Capital Acquisitions Tax (CAT). Since both parents can each gift €3,000 to their child annually, this means they can collectively transfer €6,000 per year tax-free into a bare trust for their child:

• Tax-free gifts that don’t affect future inheritance allowances
• Parents, grandparents, and anyone else who wishes can make contributions to the child’s trust.
• A structured way to build significant wealth over time

 

Capital Acquisitions Tax (CAT) Framework*

The CAT system operates on a tiered structure based on relationships:

Group A: Parent to Child

• Threshold: €400,000
• Ideal for long-term family planning
• Includes stepchildren and foster children

Group B: Close Family

• Threshold: €40,000
• Applies to siblings, grandparents, nieces, and nephews
• Useful for extended family planning

Group C: Other Relationships

• Threshold: €20,000
• Covers all other gift-giving relationships
• Still offers significant tax-free potential

Any gifts exceeding these thresholds are taxed at 33% on the excess amount only.

 * The Capital Acquisitions Tax (CAT) thresholds mentioned are not an exhaustive list and are subject to change. For the most up-to-date and comprehensive information we recommend visiting the Revenue Commissioners website: www.revenue.ie.

 

Key Considerations for Parents

• Irrevocable Gift – Once assets are placed in a bare trust, they legally belong to the child and cannot be taken back.
• Full Control at Age 18 – Unlike discretionary trusts, a bare trust automatically gives the child full control over the assets at age 18, regardless of whether they are financially responsible.
• Long-Term Planning – Parents should carefully consider their financial situation before committing to annual contributions into the trust.

 

Why should we consider using a Bare Trust

Bare trusts offer a range of benefits in financial planning, particularly in the following areas:

Education Funding

• Secure funds for future education expenses
• Benefit from long-term investment growth
• Provide a tax-efficient way to cover education costs

Property Investment

• Build savings for a future property deposit
• Establish a structured and disciplined savings plan
• Accumulate significant capital over time

Succession Planning

• Enable seamless wealth transfer
• Minimise potential inheritance tax liabilities
• Establish clear and legally structured ownership arrangements

 

Investing the Small Gift Allowance

Funds placed in a bare trust can be invested in investment funds, allowing the assets to grow over time through capital appreciation. Parents can choose a diversified portfolio tailored to long-term financial goals, such as equity funds for higher growth potential or balanced funds for stability. By consistently contributing and reinvesting earnings, the trust benefits from compound growth, potentially turning regular tax-free gifts into a substantial financial resource by the time the child reaches 18.

 

Example

If both parents contribute €3,000 per year into a bare trust from the time the child is born until they turn 18, they will have transferred €108,000 tax-free. This money could then be used to fund their child’s university education, help with a house deposit, or provide a financial safety net as they enter adulthood. The below example gives an estimate on what can be achieved when this money is invested, using a conservative 5% growth rate:

• Monthly Contribution: €500.00
• Annual Return: 5.00%
• Policy Term: 18 years
• Gross Interest Earned: €66,601
• Saved Amount (Excluding Interest): €108,000
• Total Fund (Gross): €174,601

**This is all before taxation is applied to profits**

 

Exit Tax

It is also important to note that Exit Tax (currently 41%) applies to a bare trust. This tax is levied when assets are transferred or disposed of, and it is important to plan for this tax liability in advance.  Exit tax is only chargeable to the profits made.

 

Disadvantages of a bare trust

A bare trust has many advantages, however there are a few points to be aware of.

A bare trust can only be set up to benefit a child who is under 18. If you wish to give a gift of money to someone over 18, a bare trust cannot be used.

It is also important to be certain that you will not need access to the money in the future as the money put in trust for the beneficiary legally becomes the owner of the assets. The bare trust cannot be revoked in the future.

 

Conclusion

A bare trust is a tax-efficient way for parents in Ireland to transfer wealth to their child while leveraging the Small Gift Exemption to build long-term savings for education, property, or financial security. While it provides structured wealth accumulation and inheritance tax benefits, parents must consider its irrevocable nature, the child’s full control at age 18, and potential Exit Tax (41%) on investment gains. Careful planning and professional advice are essential to ensure the trust aligns with long-term financial goals.