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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. The rates are lower than the 40% death rate, but they recur, and they are calculated on the trust rather than on the estate. This guide sets out how each of the three is worked out.
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. Trusts are drafted and administered by solicitors and trust practitioners; this page explains the tax charges rather than advising on whether a trust is appropriate.
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 the chargeable transfers the settlor has made in the previous seven years. Potentially exempt transfers do not cumulate for this purpose — an outright gift to an individual is not a chargeable transfer unless and until the donor dies within seven years of it. If no chargeable lifetime transfers have been made in the previous seven years, the full £325,000 nil-rate band is available, so up to £325,000 can enter the trust with no immediate IHT charge.
That £35,000 is the figure where the trustees pay the tax out of the trust. Where the settlor pays it instead, the tax is itself a further loss to their estate, so the transfer is grossed up and the effective rate on the excess is 25% rather than 20% — £175,000 × 25% = £43,750. GOV.UK puts it as: "If the trustees pay, the rate of tax is 20%. If the settlor pays the Inheritance Tax instead of the trustee, this means there will be an increased loss from the settlor's estate."
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 complete quarter that has elapsed since the last 10-year anniversary. In practice the exit charge is lower than the periodic charge because assets leave partway through the 10-year period.
Two situations produce no exit charge at all. GOV.UK states there is no charge "when the asset is transferred out of the trust within 3 months of setting up a trust, or within 3 months following a 10 year anniversary". Exits before the first 10-year anniversary are also calculated differently: there is no anniversary rate to apportion yet, so the rate is derived from the position when the settlement was created.
Charges are reported to HMRC on form IHT100, together with the relevant event form — IHT100a to IHT100g, depending on which charge has arisen.
The exit charge applies to capital leaving the trust — property ceasing to be relevant property. Income paid out to a beneficiary is not an exit for these purposes; it is dealt with under the income tax rules for discretionary trusts, which is a separate charge with its own rate and its own tax credit for the beneficiary. Where an exit charge does arise, the beneficiary receives the amount net of it if the trustees bear the tax.
For assets that qualify for BPR or APR (business or agricultural property), the relief reduces the chargeable amount for both periodic and exit charges. From 6 April 2026 a separate £2.5m allowance applies to the combined value of relievable agricultural and business property held in trusts, with 50% relief above it — this is distinct from the £2.5m allowance available to an individual's estate (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:
Settling an amount equal to the available nil-rate band produces no entry charge, and growth after that accrues in the trust rather than in the estate. A charge then arises at the 10-year point on the value above the nil-rate band available to the trust.
Two things qualify that. The settled amount stays in the settlor's cumulative total of chargeable transfers for seven years, so it reduces the nil-rate band available for anything else they give away in that period, and the value only leaves their estate at all if they survive the seven years. And a settlor who is capable of benefiting from the trust has made a gift with reservation, which puts the property back in their estate on death however long ago it was settled.
Spouses and civil partners each have their own nil-rate band and their own seven-year cumulation, so each can settle within it. Section 62A of the Inheritance Tax Act 1984, inserted by the Finance (No. 2) Act 2015, counters the use of multiple settlements to spread value across separate nil-rate bands: where the same settlor increases the value of two or more relevant property settlements on the same day, those "same-day additions" are brought into the periodic charge calculation for each of them.
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