Inheritance Tax 10 Year Charge: What You Need to Know

Inheritance tax planning can be complicated, especially when trusts are involved. One concept that often causes confusion is the inheritance tax 10 year charge. If you’re setting up or managing a trust, understanding this rule is essential to avoid unexpected tax bills and to protect your family’s wealth.

In this guide, we’ll break down what the 10 year charge is, when it applies, how much it could cost, and how to plan ahead effectively. If you manage a trust or are considering one as part of your estate planning, this article will give you the clarity you need.

For tailored advice on trusts and inheritance tax, book a free consultation with MP Estate Planning.

What Is the Inheritance Tax 10 Year Charge?

The 10 year charge, also known as the periodic charge, is a form of inheritance tax (IHT) that applies to most discretionary trusts. It is assessed every 10 years after the trust is created and can result in a tax charge on the value of the trust’s assets.

Discretionary trusts do not transfer assets outright to beneficiaries. Instead, trustees have control over when and how the assets are distributed. Because the assets are held in trust and not taxed as part of an individual’s estate upon death, HMRC applies the 10 year charge to ensure some level of taxation occurs over time.

Why the Rule Exists

The UK government introduced the 10 year charge to prevent people from using trusts to permanently avoid inheritance tax. Instead of escaping IHT completely, discretionary trusts are subject to ongoing reviews and potential taxation.

Which Trusts Are Affected by the 10 Year Charge?

The 10 year charge primarily affects relevant property trusts, which include:

• Discretionary trusts
• Interest in possession trusts created on or after 22 March 2006
• Accumulation and maintenance trusts that have been altered

Trusts that do not fall into the relevant property category—such as bare trusts or qualifying interest in possession trusts created before the 2006 changes—are not usually subject to the 10 year charge.

When Is the 10 Year Charge Assessed?

The 10 year charge is assessed every 10 years from the date the trust was created. This date is known as the ten-year anniversary. The tax is calculated based on the value of the trust’s assets at that point in time, minus any applicable exemptions or reliefs.

Trustees are legally responsible for calculating the tax owed and reporting it to HMRC. If the trust was set up in April 2014, for example, the first 10 year charge would be due in April 2024.

For detailed official guidance, see the GOV.UK guidance on inheritance tax on trusts.

How Is the 10 Year Charge Calculated?

The maximum 10 year charge is 6% of the trust’s value over the nil rate band, which is currently £325,000 (as of 2024). If the trust’s assets exceed the nil rate band, inheritance tax is due on the excess.

Basic Calculation Example

• Total value of trust: £500,000
• Nil rate band: £325,000
• Taxable amount: £175,000
• Tax due: £175,000 x 6% = £10,500

However, this is a simplified example. Several factors can influence the actual tax owed, including:

• Whether the trust received any chargeable transfers in the 7 years before creation
• Whether business or agricultural property reliefs apply
• How the trust assets have been managed over time

To ensure accurate reporting and compliance, it’s advisable to seek professional assistance. Book a call with MP Estate Planning if you’re unsure about your obligations.

Are There Other Charges on Trusts?

Yes, trusts may also face the following charges:

1. Entry Charge

This is a one-off tax that applies when assets are transferred into a relevant property trust and the transfer exceeds the nil rate band. It is also capped at 20% if paid during the donor’s lifetime.

2. Exit Charges

Exit charges apply when assets are distributed from the trust between 10-year anniversaries. These are pro-rated based on the time since the last periodic charge or trust creation.

Can the 10 Year Charge Be Avoided?

It’s not usually possible to completely avoid the 10 year charge on discretionary trusts, but you can take steps to minimise or reduce the tax burden:

1. Use the Nil Rate Band Strategically

Keep trust assets below the current nil rate band of £325,000 to avoid a tax charge entirely. This may involve spreading assets across multiple trusts or using staggered transfers.

2. Consider Business or Agricultural Property Relief

If the trust contains business or agricultural assets, reliefs of up to 100% may apply. These can significantly reduce the trust’s taxable value.

3. Time Distributions Carefully

Exit charges are lower if assets are distributed shortly after a ten-year anniversary, since much of the tax will have just been paid. Planning the timing of distributions can help manage tax exposure.

4. Review the Type of Trust

Depending on your circumstances, another type of trust—like a life interest trust—might offer better tax treatment.

For strategic advice on trust planning, see our guide on Inheritance Tax Planning.

Trustees’ Responsibilities for the 10 Year Charge

Trustees must:

• Calculate the 10 year charge
• Submit form IHT100 to HMRC
• Pay the tax within 6 months of the 10-year anniversary
• Keep detailed records and asset valuations

Failure to comply can result in interest charges and penalties. HMRC can also hold trustees personally liable if the trust fails to pay the tax due.

Do All Trusts Need to Pay the 10 Year Charge?

No, the 10 year charge does not apply to:

• Bare trusts: Where assets are held for a named beneficiary who has immediate access
• Disabled person’s trusts: Special rules apply to protect vulnerable beneficiaries
• Interest in possession trusts created before March 2006

Always consult a professional to determine whether your trust qualifies for an exemption.

Common Mistakes to Avoid

• Ignoring the anniversary date: Trustees must be aware of when charges apply
• Incorrect asset valuation: Can lead to underpayment or HMRC penalties
• Not claiming reliefs: Valuable business and agricultural reliefs are often overlooked
• Poor documentation: Keep full records of transactions, valuations, and trust deeds

Real-Life Example: Trust Faces Unexpected £9,000 IHT Bill

In one recent case, a family placed £400,000 into a discretionary trust in 2013. They failed to plan ahead for the 10-year review. By 2023, the trust had grown to £480,000. Because it exceeded the nil rate band, the trustees had to pay a 6% tax on £155,000, equating to £9,300. Proper planning and use of reliefs could have reduced this bill—or avoided it entirely.

Planning Ahead for Future Charges

The best way to manage the 10 year charge is by preparing early and reviewing your trust every few years. Don’t wait until just before the charge is due to act.

Book your free consultation with MP Estate Planning to explore your options for reducing inheritance tax exposure and safeguarding your assets for the next generation.

Conclusion: Stay Informed, Stay Protected

The inheritance tax 10 year charge is a critical consideration for anyone managing or setting up a trust. While the rules are complex, understanding them can help you avoid costly mistakes and ensure your assets are used the way you intend.

With the right planning, professional advice, and timely action, you can protect your estate from unnecessary tax and pass on more to your loved ones. If you’re unsure about how the 10 year charge applies to your trust, we’re here to help.

• Book your free consultation with a trust expert
• Visit our Inheritance Tax Planning page to learn more