The child owns a bare trust absolutely and is normally taxed on it - but who funded it decides the UK answer, and a US-citizen child brings a filing history of their own.
A bare trust is the simplest way to hold money for a child in the UK: an adult holds the account, but the child owns what is in it absolutely and is normally taxed on it as the owner. A "designated account" is usually the same arrangement wearing a fund manager's label. For an American family the wrapper is the least interesting part of the decision - what matters is who put the money in, what the account holds, and the fact that a US-citizen child is a US taxpayer from birth.
In a bare trust the beneficiary is absolutely entitled to the property. GOV.UK puts it plainly: assets in a bare trust are held in the name of a trustee, but the beneficiary has the right to all of the capital and income of the trust at any time if they are 18 or over in England and Wales, or 16 or over in Scotland. The adult is a nominee. They hold legal title and do the administration; they do not hold the economic ownership, and they cannot later change their mind about who benefits.
That drives the UK tax answer. GOV.UK states that if you are the beneficiary of a bare trust you are responsible for paying tax on income from it, that the fixed tax-free limit available to other trusts does not apply, and that you may be able to use your Personal Allowance. A child has a personal allowance like anyone else, and usually has almost no other income. That is the entire attraction: investment income of a sensible size, held in a bare trust for a child, often carries no UK tax at all.
A designated account is not a separate legal animal. It is an account or fund holding opened by an adult and marked with the child's initials, offered for decades as the low-friction way to invest for a child without a formal trust deed.
Whether it is treated as a genuine bare trust depends on the facts and on the provider's terms rather than on the label. Where the designation is backed by a clear intention to give the money to the child irrevocably, it behaves as a bare trust and the child is the owner. Where the adult has in substance kept the money - drawing on it, or holding it under terms that let them redirect it - the designation may achieve very little. Ask the provider, in writing, what their designation means before assuming any tax treatment.
Here is the point that decides who should write the cheque. Where a parent provides the funds, HMRC's manuals confirm that under ITTOIA/S629 the income is deemed to be that of the parent for tax purposes and is not treated as the child's, for settlements made on or after 9 March 1999, and that this extends to bare trusts as well as to interest in possession and discretionary trusts.
There is a small limit. HMRC states that where the total relevant settlement income of a child from settlements of one parent does not exceed £100 in any tax year, the legislation does not apply in that year. Two features of that limit surprise people. It applies per parent, so each parent's gifts are tested separately. And it is not a de minimis carve-out: HMRC's own examples treat the whole of the income as the parent's once the £100 is exceeded, not merely the excess.
GOV.UK gives the everyday version of the same rule: tell HMRC if, in the tax year, the child gets more than £100 in interest from money given by a parent, and the parent pays tax on all the interest if it is above their own Personal Savings Allowance. Crucially, the same page confirms the £100 limit does not apply to money given by grandparents, relatives or friends.
So the classic arrangement - grandparents fund a bare trust, and the income is genuinely the child's - works because of who the settlor is. One warning from the same HMRC manual: where a grandparent's gift is in substance arranged by the parent, HMRC may conclude the true settlor is the parent after all. Reciprocal arrangements between two sets of grandparents invite the same scrutiny. The gift needs to be real.
At 18 in England and Wales, or 16 in Scotland, the child can ask for the money and the adult must hand it over. There is no discretion, no staged release, no condition about university or a first home. That is not a drafting flaw; it is the definition of a bare trust, and it is the trade-off for the tax treatment.
Families who want control past that age need a different structure, with different UK consequences and a materially heavier US profile - a discretionary trust holding funds for a US-citizen beneficiary raises the questions we cover in our article on foreign trusts and Form 3520. For most families the honest choice is to accept the age point and size the account accordingly.
A US-citizen child is a US taxpayer from birth, and is not a footnote on a parent's return. Once their income crosses the filing thresholds, the child has their own US return to file, in their own name, with their own Social Security number.
For US purposes a bare trust is frequently looked through, so that the child is treated as the owner of the underlying assets and reports the income directly. That aligns tidily with the UK answer where a grandparent funded it. But it is fact-dependent and should not be assumed: the analysis turns on the terms, the child's entitlement, and whether the arrangement is a trust at all for US purposes. Where it is a trust, the court test and control test determine whether it is foreign, and the grantor trust rules in sections 671 to 679 determine who is taxed on the income. Practitioners do not all reach the same conclusion on the same facts, and we say so plainly rather than pretending the point is settled.
Where a US-citizen child has investment income, the kiddie tax can tax part of it at a parent's rate. The IRS explains that a child's unearned income above a set amount is taxed at the parent's rate if the parent's rate is higher, and the calculation runs on Form 8615. For the 2025 tax year, the instructions put the unearned income figure at $2,700, and the rule reaches a child under 18, a child aged 18 without earned income above half their support, and a full-time student aged 19 to 23 in the same position. IRS Topic 553 sets out the same conditions and notes a separate election on Form 8814 for parents reporting a child's income on their own return, with a gross income limit of $13,500 for 2025. These figures are set annually - confirm the current year's before relying on them.
The practical consequence is that a bare trust built to use a child's UK allowances can still produce a US charge at an adult rate. The two systems are not measuring the same thing, on the same year, in the same currency.
This is where UK children's portfolios most often go wrong for American families. The IRS treats a foreign corporation as a passive foreign investment company where 75% or more of its gross income is passive, or at least 50% of its assets produce passive income or are held for its production. UK unit trusts, OEICs and investment trusts routinely meet that description.
PFIC treatment is punitive and the reporting is heavy, and it applies to a child exactly as it applies to an adult. The Form 8621 instructions also contemplate a US person treated under sections 671 to 679 as the shareholder of PFIC stock held in trust. Our explainer on PFIC rules for US investors abroad sets out the mechanics. The design answer is usually simple: for a US-citizen child, what sits inside the account deserves more thought than which account it is.
Two reporting questions follow, and they are genuinely questions rather than settled answers for accounts held for a minor.
Who funds the account, and what it holds, matter more than the wrapper. A grandparent-funded bare trust holding direct securities is a very different proposition from a parent-funded designated account full of UK funds, though both are described the same way at the school gate. Our companion articles cover the alternatives families weigh alongside this one: the Junior ISA for US-citizen children and the 529 plan for UK-resident US families.
We are usually asked to look at an account that already exists, opened with good intentions by a grandparent who was not thinking about Washington. The work is to establish who the settlor really was, test the UK position against the parental settlement rule, look through to what is actually held, and build the child's US filings. A licensed CPA or Enrolled Agent reviews and signs off every US filing; the UK side is reviewed by an ACCA-qualified accountant.
Our US-UK expat tax service sets out the engagement. If you are about to open an account for a child with US citizenship, or one already exists, book a confidential consultation.
This article is general information, not tax, legal or investment advice, and does not create a professional relationship. Nothing here is a recommendation to open, retain or close any account or to buy or sell any investment. Outcomes are highly fact-dependent, several points of US treatment described above are unsettled, and rates, thresholds and allowances change - confirm the current position with a licensed professional before acting.
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Reviewed by a CPA / Enrolled Agent. Last updated: 19 September 2026.
Official sources: GOV.UK Trusts and taxes: types of trust | GOV.UK Trusts and Income Tax | GOV.UK Savings for children | HMRC TSEM4300 | HMRC TSEM4310 | IRS Topic 553 | IRS Form 8615 instructions | IRS Form 8621 instructions | IRS FBAR | IRS Form 8938 thresholds | IRS foreign trust reporting