Key facts
- Exit charges apply when capital is distributed from a relevant property trust to beneficiaries.
- The rate is based on the last 10-year anniversary charge (or a notional rate if the first anniversary has not yet occurred).
- The charge is proportionate — calculated as a fraction of complete quarters since the last anniversary.
- The maximum exit charge rate is approximately 6% × 10/40 = 1.5% per quarter-period.
- Distributions of income (not capital) are generally exempt from exit charges.
What Is an Exit Charge?
An exit charge is an IHT charge that arises when capital leaves a relevant property trust. This includes distributions to beneficiaries, appointments of assets out of the trust, and situations where property ceases to be relevant property.[1]
The purpose of exit charges (along with 10-year anniversary charges) is to ensure that trust assets bear a broadly equivalent IHT burden to assets held personally. Without these charges, assets could remain in trust indefinitely free of IHT.
When Exit Charges Arise
Exit charges are triggered by:[2]
- Capital distributions — payments of capital to beneficiaries
- Appointments out — transfer of assets from the trust to a beneficiary
- Trust ending — when the trust is wound up and assets distributed
- Property ceasing to be relevant property — e.g. a beneficiary becoming absolutely entitled
- Resettlement — moving assets to a different trust (treated as an exit from the first trust)
Exit charges do not apply to distributions of income, nor to capital leaving the trust within 3 months of its creation or within 3 months of a 10-year anniversary.
Exit Charges After the First 10-Year Anniversary
When capital leaves the trust between 10-year anniversaries, the exit charge rate is based on the rate applied at the last anniversary:[3]
- Take the effective rate from the last 10-year anniversary charge
- Divide by 40
- Multiply by the number of complete quarters since the last anniversary
- Apply this rate to the value of the property leaving the trust
Example: A trust had a 10-year anniversary rate of 4.2%. Three years and two months later (13 complete quarters), £100,000 of capital is distributed. Exit charge rate: 4.2% ÷ 40 × 13 = 1.365%. Tax: £100,000 × 1.365% = £1,365.
Exit Charges Before the First Anniversary
If capital leaves the trust before its first 10-year anniversary, there is no prior anniversary rate to use. Instead, a notional rate is calculated based on:[2]
- The value of the trust property when the trust was created
- Any CLTs made by the settlor in the 7 years before creating the trust
- The nil-rate band at the time of the exit
The formula then follows the same approach: effective rate ÷ 40 × number of complete quarters since the trust was created.
Exit Charge Rate Summary
| 10-Year Rate | Exit After 1 Year (4 quarters) | Exit After 5 Years (20 quarters) | Exit After 9 Years (36 quarters) |
|---|---|---|---|
| 2% | 0.20% | 1.00% | 1.80% |
| 4% | 0.40% | 2.00% | 3.60% |
| 6% | 0.60% | 3.00% | 5.40% |
Exempt Exits
Certain exits are exempt from the charge:
- Distributions within 3 months of the trust’s creation
- Distributions within 3 months of a 10-year anniversary
- Payments of income (not capital) to beneficiaries
- Payments for trust management costs and fees
- Transfers to charity or for national purposes
Planning point: Where possible, trustees should time capital distributions immediately after a 10-year anniversary (within the first 3 months for a zero exit charge, or early in the next decade for a minimal charge). The later in the 10-year cycle a distribution is made, the higher the exit charge.
Reporting and Payment
Trustees must report exit charges to HMRC using form IHT100 and the relevant event form. The tax is due 6 months after the end of the month in which the chargeable event occurred. Interest is charged on late payments.
Frequently Asked Questions
When does an exit charge arise?
An exit charge arises whenever capital (not income) leaves a relevant property trust, whether by distribution to beneficiaries, appointment of assets out of the trust, or the trust coming to an end. It also applies when property ceases to be relevant property within the trust.
How is the exit charge rate calculated?
The exit charge rate is based on the effective rate at the last 10-year anniversary, divided by 40, then multiplied by the number of complete quarters since that anniversary. If the exit occurs before the first 10-year anniversary, a notional entry rate is calculated instead.
Is there an exit charge on income distributions?
No. Distributions of trust income to beneficiaries are not subject to exit charges. Only distributions of capital (or property ceasing to be relevant property) trigger the charge. However, income retained and accumulated within the trust becomes capital and would be subject to exit charges on distribution.
Can exit charges be avoided?
Exit charges can be minimised but not entirely avoided when capital needs to leave the trust. Timing distributions immediately after a 10-year anniversary (when the quarter count resets) can reduce the charge. Distributing assets that qualify for BPR or APR may also help.
Further Reading
- 10-Year Anniversary Charges — the periodic charge that sets the exit rate
- Trusts and Inheritance Tax — overview of trust types and IHT
- IHT on Trust Creation — the initial entry charge
- Using Trusts for IHT Planning — strategies to minimise trust charges
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