18 to 25 trust

What is an 18 to 25 trust?

An 18 to 25 trust is a trust that can be created by will that qualifies for special inheritance tax treatment. It is often chosen by parents who want to delay their children’s entitlement to their inheritance beyond the age of 18. Under an 18 to 25 trust, a beneficiary needs to become entitled to the capital in the trust by the age of 25.

An 18 to 25 trust needs to have been created by the will of one of the beneficiary’s parents. Up until 22 March 2006, anyone could make one.

The advantage of an 18 to 25 trust over a bereaved minor’s trust is that your children’s entitlement will be delayed to age 25 rather than age 18. But there is an inheritance tax cost associated with an 18 to 25 trust which needs to be weighed up against your children receiving their inheritance at an early age.

You should consider using an 18 to 25 trust in your will if:

  • you are, or expect to be, the parent or step-parent of a child under the age of 25; and
  • you want your child or children to become entitled to your estate when they reach 25.

If you think your children will not be mature enough to receive large sums of money at age 25, you may like to consider leaving your estate on discretionary trusts or giving your children a life interest in your estate.

Taxation of 18 to 25 trusts

While the beneficiary is under 18, no inheritance tax is charged. But once the beneficiary reaches 18, there will be an inheritance tax charge for keeping the assets in trust, in the same way as for a discretionary (relevant property) trust.

If the assets are kept in trust until the beneficiary is 25, there will be a maximum inheritance tax charge of 4.2% of the value of the trust assets when the assets pass to the beneficiary. This charge will be proportionately less if the assets are distributed before the age of 25. Many parents feel this is a price worth paying to prevent their children from inheriting large sums at a young age. There will also be a charge to inheritance tax if assets are taken out of the trust to be used for the child’s benefit before the age of 25 (this is known as an ‘exit charge’).