Trusts and Inheritance Tax

Key facts

Relevant property trusts (mainly discretionary trusts) face IHT entry charges, 10-year charges, and exit charges.
Bare trusts are transparent for IHT — assets belong to the beneficiary and are taxed as part of their estate.
Interest in possession trusts created before 22 March 2006 give the life tenant a “qualifying interest” — the trust assets form part of their estate.
Post-March 2006 interest in possession trusts are generally treated as relevant property and face periodic and exit charges.
From 6 April 2026, BPR and APR relief on trust-held assets is capped in line with the £2.5 million allowance.

Overview of Trusts and IHT

A trust is a legal arrangement where trustees hold assets for the benefit of beneficiaries. For IHT purposes, the type of trust determines how and when tax is charged. The IHT treatment of trusts changed significantly on 22 March 2006, and the current rules categorise trusts broadly into two groups: relevant property trusts and everything else.^[1]

Key point: The type of trust and when it was created are critical to understanding the IHT treatment. Pre-March 2006 and post-March 2006 trusts can have very different IHT consequences.

Relevant Property Trusts

Relevant property trusts are subject to the full IHT trust regime, including:^[2]

Entry charge — a lifetime IHT charge of up to 20% when the trust is created (a CLT)
10-year anniversary charge — a periodic charge of up to 6% every 10 years
Exit charge — a proportionate charge when capital leaves the trust

The following trusts are treated as relevant property:

Discretionary trusts — where trustees decide who benefits and when
Accumulation trusts — where income can be accumulated
Interest in possession trusts created after 22 March 2006 (unless a qualifying special type)
Mixed trusts — with both relevant property and non-relevant property elements

Bare Trusts

A bare trust (or “simple trust”) holds assets for a beneficiary who has an absolute right to both the capital and income. For IHT purposes, bare trusts are transparent — the assets are treated as belonging to the beneficiary.^[3]

No 10-year charges or exit charges apply
A gift into a bare trust is a PET, not a CLT
The trust assets form part of the beneficiary’s estate on their death
Commonly used for holding assets for minor children

Interest in Possession Trusts

An interest in possession (IIP) trust gives a beneficiary (the “life tenant”) the right to income from the trust, while the capital passes to others (the “remaindermen”) on the life tenant’s death. The IHT treatment depends on when the trust was created:^[2]

IIP Trust Type	IHT Treatment	On Life Tenant’s Death
Created before 22 March 2006	Not relevant property — qualifying interest in possession	Trust assets form part of life tenant’s estate
Created after 22 March 2006	Relevant property — subject to periodic and exit charges	Exit charge (not part of life tenant’s estate)
Immediate post-death interest (IPDI)	Not relevant property	Trust assets form part of life tenant’s estate
Disabled person’s interest	Not relevant property	Trust assets form part of beneficiary’s estate

The March 2006 Changes

The Finance Act 2006 fundamentally changed the IHT treatment of trusts. Before 22 March 2006:

Creating an IIP trust was a PET (potentially exempt transfer)
The life tenant was treated as owning the trust assets for IHT purposes
Only discretionary trusts faced the relevant property regime

After 22 March 2006, most new trusts (including IIP trusts) are treated as relevant property and face entry charges, 10-year charges, and exit charges. The main exceptions are bare trusts, immediate post-death interests, and disabled person’s trusts.^[1]

Planning point: Pre-March 2006 IIP trusts that still exist retain their original favourable IHT treatment. Changing the terms of such a trust (e.g. terminating the life interest) can trigger a loss of this protected status, so professional advice is essential.

Summary of Trust IHT Charges

Charge	When	Maximum Rate
Entry charge (CLT)	When assets are settled into the trust	20% (lifetime rate)
10-year anniversary	Every 10th anniversary of the trust	6% (effective maximum)
Exit charge	When capital is distributed to beneficiaries	Proportionate to last 10-year charge
Death within 7 years	If settlor dies within 7 years of creating the trust	40% (death rate, less lifetime tax paid)

Frequently Asked Questions

What is a relevant property trust?

A relevant property trust is one where the assets are subject to the IHT periodic (10-year) and exit charge regime. Most discretionary trusts and post-March 2006 interest in possession trusts are relevant property trusts. Bare trusts and pre-March 2006 qualifying interest in possession trusts are not.

Are bare trusts subject to IHT?

Bare trusts are IHT-transparent. The assets belong absolutely to the beneficiary, so they form part of the beneficiary’s estate for IHT purposes. There are no 10-year or exit charges. A gift into a bare trust is a PET (potentially exempt transfer), not a CLT.

What changed in March 2006?

The Finance Act 2006 brought most new interest in possession trusts into the relevant property regime. Before 22 March 2006, creating an interest in possession trust was a PET. After that date, it is a CLT, and the trust faces 10-year and exit charges like a discretionary trust.

Do trusts have their own nil-rate band?

Trusts do not have a separate NRB. However, the NRB is used in calculating 10-year and exit charges. If the settlor created multiple trusts after 6 June 2014, the NRB is divided equally between them for charge calculations.

Sources

Trusts and Inheritance Tax — GOV.UK
IHTM42000 – Relevant property trusts — HMRC
IHTM16000 – Settled property — HMRC