Trusts and Inheritance Tax — Discretionary Trusts and the Relevant Property Regime

Why Use a Trust for IHT Planning?

A trust is a legal arrangement in which assets are held by trustees for the benefit of named or class beneficiaries. When assets are transferred into a discretionary trust, they leave the settlor's personal estate — meaning they are no longer counted when calculating IHT on the settlor's death (provided the settlor survives seven years after the transfer).

Trusts also allow the settlor to retain some control over how and when assets are distributed, which a straightforward gift does not. This makes them particularly useful for families with younger beneficiaries, vulnerable beneficiaries, or where the settlor is uncertain which family members will need the money most.

Transfers Into Trust — The Entry Charge

Unlike a straightforward gift to an individual (a potentially exempt transfer), a transfer into a discretionary trust is a **chargeable lifetime transfer (CLT)**. If the cumulative value of CLTs in the seven years before the transfer exceeds the nil rate band (£325,000), an immediate IHT charge of **20%** applies on the excess (the half-rate, rising to 40% if the settlor dies within seven years).

Careful planning — spreading transfers over multiple years, using annual exemptions and ensuring the value does not exceed the NRB — can usually avoid an immediate charge.

The Relevant Property Regime

Discretionary trusts are subject to the **relevant property regime**, which imposes two ongoing IHT charges:

1. The 10-Year Anniversary Charge

Every ten years from the date the trust was created, the trustees must calculate an IHT charge on the value of trust assets above the NRB. The maximum rate is **6%** — a deliberate structure to replicate the IHT that would have been charged over time if the assets had passed on a death.

2. Exit Charges

When assets leave the trust — for example, when the trustees appoint capital to a beneficiary — an exit charge applies. The rate is proportional to the 10-year charge, based on how long has elapsed since the last 10-year anniversary.

How 6% Compares to 40%

At first glance, 6% every 10 years is considerably more attractive than a 40% death charge. For large estates where the trust assets are expected to grow significantly, a discretionary trust can produce substantial long-term IHT savings even after accounting for the 10-year charges.

However, the trust also incurs compliance costs — annual accounts, trustee meetings, and professional trust administration — which must be weighed against the tax savings.

Property in Trust — Practical Issues

Putting residential property directly into a discretionary trust has historically been more complex than cash or investments. Stamp duty land tax may be payable on the transfer (at 15% for corporate or trust acquisitions, with limited exceptions). Capital gains tax may also arise if the property has appreciated since acquisition.

Most advisers recommend keeping property out of trust and instead using insurance policies or investment assets, while leaving property to pass under a will with appropriate use of the NRB and RNRB.

Is a Trust Right for You?

A discretionary trust is not a one-size-fits-all solution. It works best for:

• Estates significantly above the combined NRB and RNRB threshold
• Families with complex beneficiary needs (e.g. a child with a disability)
• Business owners and high-net-worth individuals with varied asset classes

Start with our [Inheritance Tax Calculator](/inheritance-tax-calculator) to understand your estate's current IHT exposure, then seek specialist solicitor or financial planner advice before setting up any trust structure.