IHT on Trust Creation

Key facts

Creating a relevant property trust (e.g. a discretionary trust) is a chargeable lifetime transfer (CLT).
The lifetime rate is 20% on any amount exceeding the available nil-rate band (£325,000 for 2026/27).
If the donor pays the IHT, the tax payment must be “grossed up” — making the effective rate 25%.
CLTs in the previous 7 years reduce the available nil-rate band for a new transfer.
If the settlor dies within 7 years, the CLT is recalculated at the 40% death rate, with credit for lifetime tax paid.

The Entry Charge on Trust Creation

When you settle assets into a relevant property trust (most commonly a discretionary trust), the transfer is classified as a chargeable lifetime transfer (CLT). Unlike potentially exempt transfers (PETs), a CLT is immediately chargeable to IHT at the lifetime rate of 20%.^[1]

The charge only arises on the amount by which the CLT exceeds the available nil-rate band. Most people plan trust settlements to stay within the NRB, so in practice many trusts are created with no immediate IHT to pay.

Calculating the Entry Charge

The calculation follows these steps:^[2]

Determine the value of the assets being settled into the trust
Add up any other CLTs made in the previous 7 years
Deduct the nil-rate band (£325,000 for 2026/27)
Charge IHT at 20% on any excess

Example: Sarah settles £400,000 into a discretionary trust. She has made no other CLTs in the previous 7 years. The first £325,000 is covered by the NRB. The excess is £75,000. Lifetime IHT (trustees pay): £75,000 × 20% = £15,000.

Grossing Up

If the settlor pays the IHT rather than the trustees, the tax payment is treated as an additional transfer of value. The CLT must be “grossed up” to include the tax:^[3]

Who Pays the Tax	Rate Applied	Grossing Up Required?	Effective Rate on Net Gift
Trustees (from trust fund)	20%	No	20%
Settlor	20% (on gross)	Yes	25% (effective)

Grossing up formula: Gross transfer = Net gift ÷ 0.80 (for the excess above the NRB).

Practical tip: It is usually more tax-efficient for the trustees to pay the IHT from the trust fund, avoiding the need to gross up. If the settlor pays, £75,000 above the NRB would result in tax of £18,750 (instead of £15,000) because of grossing up.

Nil-Rate Band Usage

The nil-rate band is a shared resource. Any CLTs in the 7 years before a new transfer reduce the available NRB:^[2]

CLTs are set against the NRB in chronological order
Failed PETs (where the donor died within 7 years) also use the NRB
The NRB at the time of the current transfer is used for the lifetime calculation
After 7 years, earlier CLTs drop out of the cumulative total, freeing up NRB for new transfers

Death Within 7 Years

If the settlor dies within 7 years of creating the trust, the CLT is recalculated at the death rate (40%):^[1]

The NRB at the date of death is used (not the NRB at the date of the CLT)
Any excess above the NRB is taxed at 40%
Credit is given for lifetime tax already paid
Taper relief applies if the settlor survived more than 3 years
No refund is given if the recalculated tax is less than the lifetime tax

Multiple Trusts

Where a settlor creates multiple relevant property trusts on the same day or after 6 June 2014, the nil-rate band is divided equally between them for the purposes of calculating 10-year and exit charges. This prevents the perceived advantage of creating several trusts to multiply the NRB.

Frequently Asked Questions

What is the entry charge on a trust?

The entry charge is the immediate IHT liability when you settle assets into a relevant property trust. It is charged at 20% on the amount by which the transfer (plus any other CLTs in the previous 7 years) exceeds the nil-rate band of £325,000.

What is grossing up?

If the settlor pays the IHT (rather than the trustees), the tax payment itself is treated as an additional gift to the trust. The transfer must be “grossed up” to include the tax. At the 20% lifetime rate, grossing up means the effective rate on the net gift is 25%.

Can I create a trust with no IHT to pay?

Yes. If the value settled into the trust (plus any CLTs in the previous 7 years) is within the £325,000 nil-rate band, no lifetime IHT is due. This is the most common approach — many trusts are deliberately funded within the NRB.

What happens if I die within 7 years of creating the trust?

The CLT is recalculated at the 40% death rate instead of the 20% lifetime rate. Credit is given for any lifetime tax already paid. Taper relief applies if you survived more than 3 years. There is no refund if the recalculated amount is less than the lifetime tax.

Sources

Inheritance Tax: gifts — GOV.UK
IHTM14501 – Lifetime transfers: chargeable lifetime transfers — HMRC
IHTM14601 – Grossing up — HMRC