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Discretionary trusts are subject to their own IHT regime: an entry charge, a 10-year periodic charge, and an exit charge. These charges are lower than the standard 40% death rate, but they still need to be factored into any trust planning. Understanding how the charges work is essential before settling assets into a discretionary trust.
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Discretionary trust IHT involves complex calculations. This guide explains the principles. For trust planning involving life insurance, see our guide to life insurance in trust. Always take professional advice before settling assets into trust.
A discretionary trust is a legal arrangement where the settlor transfers assets to trustees, who hold them for the benefit of a class of beneficiaries. Unlike a bare trust, the beneficiaries have no fixed entitlement — the trustees have discretion over who receives income and capital, when, and in what proportions.
This flexibility makes discretionary trusts useful for:
When you settle assets into a discretionary trust (a "chargeable lifetime transfer" or CLT), IHT may be charged immediately. The rate is 20% on the excess above the available nil-rate band.
The NRB available for the entry charge depends on CLTs and potentially exempt transfers made by the settlor in the previous 7 years. If no CLTs have been made in the previous 7 years, the full £325,000 NRB is available — meaning up to £325,000 can enter the trust with no immediate IHT charge.
The settlor pays the 20% entry charge (effectively the trust receives the full £500,000 and the settlor pays IHT from other funds). If the trustees pay the IHT from trust assets, the calculation is grossed up.
If the settlor dies within 7 years of the settlement, additional IHT may be due (using the CLT against the death rate NRB). The entry charge already paid is credited against any additional liability.
On each 10-year anniversary of the trust, a periodic charge is levied on the trust assets. The maximum rate is 6% — calculated as 30% of the 20% lifetime rate. In practice, the effective rate may be lower depending on how much of the NRB is available.
At the 10-year anniversary, the charge is based on:
The effective rate on the whole trust is 2.1% (£10,500 ÷ £500,000). This is significantly lower than the 40% death rate — illustrating why trusts can still be effective IHT planning tools.
When assets are distributed from the trust to beneficiaries (an "exit"), an exit charge may apply. The exit charge is proportional — calculated based on how long has elapsed since the last 10-year anniversary.
The exit charge rate is 1/40th of the periodic charge rate for each quarter that has elapsed since the last 10-year anniversary. In practice, the exit charge is typically lower than the periodic charge because assets leave partway through the 10-year period.
When the trustees decide to distribute capital or income to beneficiaries, the exit charge applies to the distributed amount. The beneficiary receives the net amount after any exit charge paid by the trust.
For assets that qualify for BPR or APR (business or agricultural property), the relief reduces the chargeable amount for both periodic and exit charges — but note the new £2.5m cap on BPR/APR from April 2026 (see our guide to BPR changes from April 2026).
Despite the 10-year and exit charges, discretionary trusts remain useful in a number of situations:
A common strategy is to settle assets equal to the NRB (£325,000) into a discretionary trust — the entry charge is zero (within NRB), and the trust then grows outside the estate. At the 10-year point, a charge applies on growth above the NRB.
Couples can each settle up to the NRB — potentially £650,000 in trust within NRB, or more with careful timing (waiting 7 years between settlements to reset the NRB).
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