We’ll explain, in plain English, how the tax system treats trusts and what that means for your family home, savings and investments.
We set out the three main charge points: placing assets into a trust, ten-year anniversary charges, and what happens when someone dies.
Our aim is to help homeowners aged 45–75 make sensible choices. We highlight what you can do yourself and when to call a solicitor, accountant or STEP adviser.
We link to official guidance so you can check the forms and rules directly, for example the government page on trusts and inheritance tax, and to practical local advice such as inheritance tax planning in Hambrook.
Key Takeaways
- Transfers into a trust can trigger inheritance tax if they exceed thresholds.
- Relevant property trusts may face 10‑year charges and exit charges.
- Trustees usually must report and pay tax within six months of a chargeable event.
- Simple steps—gathering figures and keeping records—can reduce future stress.
- Professional advice is often needed for complex estates and property planning.
What an IHT trust is and how it can protect family wealth
Think of a trust as a locked box you set up to protect family assets and control who benefits. The settlor creates the arrangement and writes the rules in a trust deed. Trustees then hold legal title and run the box for the beneficiaries.
Who owns what for tax purposes?
Legal ownership sits with trustees, but tax treatment depends on the type of arrangement. Some assets still count as part of the settlor’s estate if the settlor keeps benefits or if the trust pulls value back into their estate.
Transfers can fall outside the estate if the settlor survives seven years. However, many lifetime transfers trigger an immediate 20% charge above the nil-rate band. A discretionary trust or other relevant property set up may also face renewal and exit charges later in its life.
| Role | Main duty | Tax effect |
|---|---|---|
| Settlor | Creates the trust set and funds it | May be treated as donor for early years |
| Trustees | Manage assets, value and report charges | Legally own assets; must pay tax when due |
| Beneficiaries | Receive income or capital under rules | May be taxed when they receive distributions |
Quick practical points
- Putting savings aside for grandchildren may reduce your estate if you survive seven years.
- Not all arrangements remove inheritance tax risk; some create entry, ten‑year and exit charges.
- Choosing reliable trustees matters: they handle valuations, forms and payment dates.
For a simple example of how a bare trust works and how it is treated on death, see our guide on bare trust inheritance tax.
Choosing the right trust type for your estate planning goal
Your planning aim should guide the trust type you pick, not the other way round. Start by deciding whether you need ongoing income, protection for capital, or a simple transfer of ownership on death.
Discretionary options for family flexibility
A discretionary trust gives trustees power to decide who gets what and when. It suits families who want flexibility and protection from individual claims.
Bear in mind: most discretionary arrangements fall under the relevant property regime and can face ten‑year and exit charges.
Simple ownership: bare trust
A bare trust is the simplest type. One beneficiary has an immediate right to the assets and any income.
That means the asset is usually treated as part of the beneficiary’s estate on their death.
Interest in possession and special categories
An interest in possession trust gives someone the right to income, and sometimes to live in a home. How and when it was created decides if its value counts in an estate.
There are also special categories for disabled beneficiaries, bereaved minors and 18–25 arrangements. These are treated differently for tax and protection purposes.
- Fit questions: who needs income, who needs protection, who will manage capital?
- Lifetime vs will: lifetime trusts can remove assets now; will trusts act on death.
Key HMRC concepts that determine whether IHT is due
Understanding labels matters. Each settled property or asset placed into a trust keeps its own identity. That label affects when a charge is triggered and which rules apply.
Settled property is HMRC’s name for assets put into a trust. It shows what was transferred, when, and by whom. This matters for calculating any immediate transfer of value and later charges.
Relevant property versus excluded property
Relevant property covers most cash, shares, land and buy-to-let property. It is the part that can attract ten‑year and exit charges based on the trust’s total value.
Excluded property can include certain overseas property and specific government securities. It may be outside inheritance tax as a matter of law, but it can still affect the rate used for some charges. If property is overseas, domicile and residence rules can change the outcome, so take advice before relying on exclusion.
The nil-rate band and the seven-year look-back
The nil-rate band is £325,000. We must check transfers and gifts in the previous seven years to see how much of that band remains. Keep dates, valuations and records to avoid surprise charges.
Need a quick refresher on the nil-rate band? See our guide on the nil-rate band for clear dates and thresholds.
How to transfer assets into trust without triggering unexpected IHT
Before you move any asset into a trust, run a simple checklist to see if a tax charge will follow.
Many transfers count as a transfer of value. This covers gifts, and sales at undervalue, plus transactions that reduce the settlor’s estate.
What to check first
Step 1: Add the new transfer to any chargeable transfers in the last seven years. Step 2: Compare the total to the nil‑rate band (£325,000).
When the lifetime rate applies and grossing up
If the trustees pay the entry charge, a 20% lifetime rate can apply on amounts above the band. If the settlor pays the tax personally, the figure is grossed up and the effective bill rises.
Death within seven years and reservations of benefit
If the settlor dies within seven years the charge can be recalculated at 40%, with credit for tax already paid. Gifts with reservation — for example gifting a home but still living in it — can bring the asset back into the estate, though rules prevent paying more than 40% overall.
Practical actions trustees must take
- Record the transfer date and market value.
- Keep valuations and paperwork safe.
- Be ready to report and pay if a charge arises.
How the 10-year anniversary charge works for relevant property trusts
Once a decade, the trust fund is revalued and a possible charge is calculated on the net amount.
When trustees must revalue
Trustees must value relevant property on the day before the ten-year anniversary. The taxable figure is the net value after allowable debts and reliefs.
Reliefs and deductions to reduce the bill
Common reductions include allowable debts and specialist reliefs such as Business Relief and Agricultural Relief. These lower the taxable property value and so the charge.
Information needed before you calculate
- Values and dates at original transfer and any same‑day settlements.
- Records of transfers in the previous seven years.
- Exits from the fund in the last ten years and any prior anniversary charges.
- Evidence of periods when an asset was not relevant property.
| Item | What to record | Why it matters | Example |
|---|---|---|---|
| Transfer date | Exact date and value | Determines look‑back and nil band use | 01/04/2015, shares £120,000 |
| Debts | Outstanding loans secured on assets | Deduct from gross value | Mortgage £30,000 |
| Reliefs | Business or agricultural evidence | Can reduce rateable value | Farm qualifies for relief |
| Periods of relevance | Months asset was relevant property | Affects quarters reduction | Held 7 years → reduced charge |
Note: If an asset was relevant for less than ten years, the charge may be reduced by quarters. Also bear in mind capital gains and other taxes can apply on disposals, so plan holistically.
What to diarise now: anniversary date, valuation window and instructing a professional valuer well before the deadline.
How exit charges apply when assets leave a trust
When assets leave a trust, a specific tax charge may be due — and timing matters.
What counts as an exit
Distributions, endings and absolute entitlement
An exit happens when capital is paid to beneficiaries, when the trust comes to an end, or when someone becomes absolutely entitled to an asset.
Even a part distribution can create a reportable event and a possible charge on the value removed.
When no exit charge applies
There are safe windows. No charge normally applies to transfers made within three months of setting up a trust.
The same three-month rule can apply after a ten‑year anniversary. Excluded property is also outside the exit charge, though it can affect other calculations.
How the “up to 6%” rate is worked out
The maximum exit rate is effectively 6%. In practice, we calculate an effective rate from the ten‑year computation and prorate it by quarters for the time since the last anniversary.
For example, a post‑anniversary exit may use a fraction of that effective rate depending on when the asset leaves.
Practical notes for trustees
- Exits in the first ten years use historic inputs; keep transfer dates and values.
- After an anniversary, the calculation uses the recent ten‑year figures and pro‑rata rules.
- Remember that income paid out can affect beneficiaries’ income tax, so check both taxes.
Quick checklist at exit: record date, value of the asset, beneficiary details and the historic figures needed for the charge calculation.
What happens when someone dies and a trust is involved
Death often brings a short window to check whether a trust’s value joins the deceased’s estate for tax and practical purposes. We focus on three situations you are likely to meet and what to do first.
If the deceased was a beneficiary
If the asset sat in a bare trust, it normally forms part of the beneficiary’s estate on death. That means executors must include the asset when they calculate the estate value.
By contrast, an interest possession arrangement can be treated differently. Whether it enters the estate depends on when and how the interest began. Some older or qualifying post-death interests still count as part of the estate.
If the settlor transferred assets in the last seven years
Transfers made by the deceased within seven years of death may be re‑assessed. A lifetime charge can be topped up to the full 40% rate, with credit given for tax already paid.
Trustees may face extra liability and the personal representative must report those transfers on the estate forms. Gather dates, values and proof of payments quickly.
If the trust is created by a will and family home planning
When a will creates a trust, the personal representative must set it up correctly and pay any tax due. Trustees then follow the will’s terms and act for beneficiaries.
The residence nil-rate band is only available in certain cases. It usually applies where direct descendants inherit and the home is treated as part of the estate, for example under a bare trust or some interest possession arrangements. Discretionary arrangements rarely qualify.
| Situation | Usual treatment | Practical action |
|---|---|---|
| Bare trust on beneficiary’s death | Asset included in estate | Value for estate tax; pass to executors |
| Interest possession | May be included depending on start date/terms | Check trust terms and dates; get legal advice |
| Transfers within 7 years | Lifetime charge may be re-calculated at 40% | Collect transfer records and tax receipts |
Quick checklist: trust deed or will terms, current valuations, transfer history for seven years, and beneficiary details. Where a home or blended family is involved, we recommend timely professional advice to avoid unexpected inheritance tax bills and delays.
How to report HMRC IHT trust charges and meet deadlines
When a chargeable event happens, timely reporting and neat records stop small mistakes becoming big bills.
Trustees must identify the correct event form from the IHT100 suite, pay by the deadline and keep proof of valuation and transfer dates. Missing items can lead to interest and compliance checks.
Which form to use and who reports
Quick guide:
| Form | Use | Who files |
|---|---|---|
| IHT100a | Lifetime chargeable transfers | Trustees |
| IHT100c | Exit charge when capital leaves | Trustees |
| IHT100d | Ten‑year anniversary charge | Trustees |
| IHT418 / IHT100b | Interest‑in‑possession endings on death | Executors / trustees as applicable |
Deadlines, calculations and records
Report and pay by the end of the sixth month after the event. Late payment can attract interest.
You can leave calculation sections blank and ask the tax office to work it out, but filing early and supplying your numbers speeds resolution.
Trustees must keep the trust deed, valuations, bank statements, transfer dates and receipts (apply for IHT122 for a payment reference early).
Other taxes and administration you still need to plan for
It helps to remember that income and gains from a trust often carry separate tax rules and filing duties. IHT is only part of the picture. Trustees must also think about income tax, capital gains and registration duties.
Income tax on trust income and what it can mean for beneficiaries
Trust income can be taxable at the trust level and may affect beneficiaries who receive payments.
Trustees should track income received, tax withheld and payments to beneficiaries. Beneficiaries may need to declare distributions on their Self Assessment if the trust paid tax at source.
Capital gains when trust assets are sold or transferred
When a trustee sells assets, capital gains can arise. The taxable gain depends on sale proceeds less acquisition value and allowable costs.
Timing, professional valuations and documented dates matter. Correct recording of the acquisition value and the sale date can reduce disputes and errors.
Trust Registration Service: when a trust may need registering
Many trusts must register on the Trust Registration Service (TRS) if they are liable to income tax, capital gains or inheritance tax, or if they meet extended rules for non-taxable arrangements.
Will-created trusts often have a two‑year window after the death before registration becomes compulsory. Check the date the trust was created and its type to confirm obligations.
Simple admin plan for trustees
- Keep a single trust file with deed, valuations, bank statements and beneficiary details.
- Diarise reporting dates and Self Assessment windows.
- Record acquisition value, sale proceeds, dates and professional valuations for any asset sale.
- Review whether the trust must register on the TRS and update information promptly.
| Issue | What to record | Why it matters |
|---|---|---|
| Income received | Bank receipts, payer details, tax deducted | Shows taxable income and supports beneficiary declarations |
| Asset disposal | Acquisition value, sale price, sale date, costs | Needed to calculate capital gains and allowable costs |
| Registration status | Trust type, creation date, tax liabilities | Determines TRS duty and filing deadlines |
Conclusion
A clear plan and tidy records are often the difference between saving tax and paying more. Trust outcomes depend on type and on the key charge events: entry, the ten‑year point and any exit. Keep that idea central when you make decisions about inheritance tax.
We have shown the practical path: choose the right trust, check entry charges against the nil‑rate band and seven‑year history, then plan for ten‑year and exit charges where relevant. Record every asset, date and market value from the start.
Common pitfalls include family home arrangements, gifts with reservation and assuming a discretionary arrangement preserves the residence nil‑rate band. Trustees must report chargeable events and pay within six months, keeping paperwork ready for queries.
Example: gifting investments into a trust can reduce an estate if you survive seven years. Example: placing a share of a home into a will trust may still form part of the estate.
Next step: list your assets and values, note any gifts in the last seven years, and speak to a UK trust and estates professional if anything is unclear.