How to Invest a £100,000 Inheritance for a Young Child

In this article, Dan Barrett, Chartered Financial Planner, answers a question about how to invest and manage a large inheritance received by a young child.

Question:

My 2-year-old daughter has inherited £100,000. As her parents, we want to make sure this money is invested wisely for her future – but we’re not sure where to start. What are our options, how should we balance risk and growth, and what are the tax implications for a child?

Understanding the Situation: How a Child’s Inheritance Is Held

When a young child inherits money, they cannot legally hold or manage it until they reach age 18. Funds for minors are commonly held under a bare trust unless the will specifies otherwise. The inheritance is therefore automatically held under a bare trust, meaning:

The child is the beneficial owner of the money.
The trustees (often parents or guardians) manage it on their behalf.
The child becomes entitled to the funds at age 18.

This is important because any investment or savings account must be opened and managed in the name of the trustees, on behalf of the child, rather than in the child’s name directly.

Step 1: Open a General Investment Account (GIA) in the Name of the Bare Trust

The trustees can open a General Investment Account (GIA) designated under the child’s bare trust. This account can hold a diversified portfolio of investments such as shares, bonds, and funds.

Because the child is the beneficial owner, any income or gains are taxed at the child’s tax rates, not the parents’. In most cases, a child’s investment income will fall within their personal allowances, meaning little or no tax is payable initially.

However, as the investments grow over time and start generating more income, tax could eventually become an issue – which is why the next step, the Junior ISA, becomes valuable.

Step 2: Use a Junior ISA for Long-Term, Tax-Free Growth

A Junior ISA (JISA) is one of the most effective ways to invest for a child’s future. Each tax year, up to £9,000 (2025/26 limit) can be paid into a JISA.

Key benefits include:

Tax-free growth: No income tax or capital gains tax on investments.
Tax-free withdrawals: When the child turns 18, they can access the funds with no tax to pay.
Long-term structure: The money is locked away until age 18, encouraging long-term investment. Over time, the JISA can hold the same investments as the GIA, but in a more tax-efficient wrapper.

It’s also worth noting that a Junior ISA is effectively a type of bare trust, meaning it fits neatly with how inherited funds for minors are already structured.

Step 3: Transfer from the GIA to the JISA Each Year

To make the most of the tax-free advantages, trustees can transfer up to £9,000 per year from the GIA into the JISA.

This gradually shifts more of the inheritance into a tax-free environment, reducing the chance of future tax issues if the GIA begins generating higher income or gains.

Even though the GIA is likely tax-free in practice for now (thanks to the child’s allowances), transferring funds to the JISA each year helps maximise tax efficiency over time.

Step 4: Invest for Growth, Then Gradually De-Risk

With around 16 years before the child turns 18, the focus should be on long-term growth. Historically, equities (shares) have provided higher returns than cash or bonds over longer periods, making them a sensible choice for most of the portfolio at this stage.

A global, diversified equity portfolio is a simple and effective way to achieve this. A global equity fund or multi-asset fund is often suitable for simplicity and diversification.

As the child approaches 18, the trustees can gradually reduce risk by increasing exposure to bonds or cash – particularly if the funds are likely to be used in early adulthood, such as for a property deposit or university costs.

Step 5: Keep It Simple and Review Regularly

Both the GIA and JISA can hold the same underlying investments. Keeping them aligned makes the strategy easy to manage.

The trustees should review the investments annually to:

Transfer funds from the GIA to the JISA (up to the annual limit).
Check performance and risk levels.
Ensure the investments remain suitable for the child’s time horizon.

Important Note on Trust Type

This approach works because the inheritance is held under a bare trust, giving the child absolute entitlement to the money at age 18.

It would not work in the same way if the funds were held under a discretionary trust, where the trustees have ongoing control and the child does not have guaranteed entitlement. In that case, different tax rules and different investment product rules would apply. For example, where the inherited funds are held under a discretionary trust, the use of a Junior ISA would not be possible, as the child does not have absolute ownership of the funds.

In Summary

The inheritance is already held under a bare trust for the child.
Trustees can open a GIA to invest the funds on her behalf.
Use a Junior ISA for tax-free growth and income.
Transfer £9,000 per year from the GIA to the JISA to maximise tax efficiency.
Invest primarily in equities for long-term growth, then de-risk as adulthood approaches.
Regular reviews keep the plan on track.

Disclaimer: This article provides general information only and does not constitute personal financial advice. Always seek tailored guidance before making investment decisions.

Daniel Barrett is a Chartered Financial Planner specialising in pensions and retirement planning, investments, and inheritance tax planning.
If you’d like to speak to Dan about your financial planning, you can book a free, no-obligation discovery meeting here.

Blog