How does inheritance tax apply to trusts?
Answered 17 March 2026
Inheritance Tax and Trusts
What the law says
1. Entry Charge (Transfer into Trust)
A transfer of assets into a relevant property trust is an immediately chargeable transfer — it cannot be a potentially exempt transfer (PET). Under IHTA 1984 s.3(1), any lifetime transfer that does not qualify as a PET is immediately chargeable to IHT.
2. The Relevant Property Regime
Most trusts (particularly discretionary trusts) hold "relevant property" and are subject to two recurring charges under IHTA 1984:
a) Ten-Year Anniversary Charge (Principal Charge) — IHTA 1984 s.64 Where immediately before a ten-year anniversary all or any part of the property comprised in a settlement is relevant property, tax shall be charged at the rate applicable under ss.66 and 67 on the value of the property at that time. The rate can be up to 6%.
b) Exit/Proportionate Charge — IHTA 1984 s.65 A charge arises:
- where property comprised in a settlement ceases to be relevant property (whether because it ceases to be comprised in the settlement or otherwise); and
- where trustees make a disposition as a result of which the value of relevant property is reduced.
No exit charge arises if the event occurs in the quarter beginning with the day the settlement commenced or with a ten-year anniversary. No charge arises on payments that are (or will be) income of any person for income tax purposes.
3. Interest in Possession Trusts — IHTA 1984 s.49
A person beneficially entitled to an interest in possession in settled property is treated as beneficially entitled to the underlying property itself. However, for interests in possession created on or after 22 March 2006, this treatment only applies if the interest is an immediate post-death interest, a disabled person's interest, or a transitional serial interest. Interests in possession created on or after 22 March 2006 that do not meet these conditions fall into the relevant property regime instead.
HMRC Guidance / Practice
1. Overview of the Relevant Property Regime
HMRC confirms that the main occasions of charge on relevant property trusts are:
- A proportionate/exit charge on distributions or dispositions in the first ten years (before the first ten-year anniversary) — calculated under IHTA84/S68
- The ten-year anniversary (principal) charge — calculated under IHTA84/S66 (rate up to 6%)
- A proportionate/exit charge on distributions between ten-year anniversaries — calculated under IHTA84/S69
The ten-year charge applies to the chargeable value of relevant property on the day before the anniversary, after deducting business and agricultural reliefs. Grossing never applies to the value at the ten-year anniversary.
2. Special / Favoured Trusts (Excluded from Relevant Property Regime)
Certain trusts do not contain relevant property and are therefore not subject to the ten-year and proportionate charges under IHTA84/S64 and S65. These include:
- Temporary charitable trusts
- Protective trusts
- Trusts for disabled persons
- Employee and newspaper trusts
- Accumulation and maintenance trusts (prior to 22 March 2006)
- Heritage Maintenance trusts
- Pension funds
- Trade or professional compensation funds
However, the property in these trusts may still be subject to a different charge on leaving the trust, or where the trust no longer satisfies the conditions for special treatment.
Two further trust types introduced by FA 2006 have their own IHT charging regimes: trusts for bereaved minors and age 18-to-25 trusts.
3. Employee Benefit Trusts (EBTs)
EBTs that meet the conditions in IHTA84/S86 are largely outside the relevant property trust charging provisions (IHTA84/S58(1)(b)). Transfers into a qualifying EBT will not be a transfer of value or may be exempt from IHT. For transfers into an EBT on or after 30 October 2024, additional conditions must be satisfied.
4. Relief from Relevant Property Trust Charges
If the trusts are altered so that the conditions for relief (e.g. under IHTA84/S86) are no longer met, the trust becomes a relevant property trust and the periodic and exit charges will apply.
Citation sources
PART III SETTLED PROPERTY CHAPTER III SETTLEMENTS WITHOUT INTERESTS IN POSSESSION , AND CERTAIN SETTLEMENTS IN WHICH INTERESTS IN POSSESSION SUBSIST Principal charge to tax Charge at other times. 65 1 There shall be a charge to tax under this section— a where the property comprised in a settlement or any part of that property ceases to be relevant property (whether because it ceases to be comprised in the settlement or otherwise); and b in a case in which paragraph (a) above does not apply, wher
The term ‘employee benefit trust’ (EBT) is used to describe a number of different sorts of trust, although they are generally discretionary trusts. In general an employer sets up an EBT as a vehicle used in a scheme to reward, and motivate employees. The benefits may be pensions, sick pay, a share of profits, shares or almost anything the employer chooses. These trusts get relief from Inheritance Tax if they meet the conditions at IHTA84/S86 (IHTM42911). With effect from 6 April 2014, a type of
All trusts containing relevant property (IHTM42161) incur a charge every ten years, at the ten year anniversary. Ten year anniversary (TYA) means the tenth anniversary of the date on which the settlement commenced (IHTM42221), and subsequent anniversaries at ten-yearly intervals. The charge is under IHTA84/S64 and known as the principal charge. It applies to the chargeable value of the relevant property in the settlement on the day before the TYA. You can deduct business and agricultural reliefs
PART III SETTLED PROPERTY CHAPTER II INTERESTS IN POSSESSION, REVERSIONARY INTERESTS AND SETTLEMENT POWERS Treatment of interests in possession. 49 1 A person beneficially entitled to an interest in possession in settled property shall be treated for the purposes of this Act as beneficially entitled to the property in which the interest subsists. 1A Where the interest in possession mentioned in subsection (1) above is one to which the person becomes beneficially entitled on or after 22nd March 2
A transfer of assets into a trust of relevant property (IHTM42161) is an immediately chargeable transfer by the settlor. (IHTM42075) The main occasions of charge on relevant property are: A proportionate/exit charge on distributions or dispositions from the trust in the first ten years since property was first added to the settlement (before the first ten year anniversary). The claim is under IHTA84/S65 and the tax is calculated under IHTA84/S68 The ten year anniversary (the principal charge)
Any lifetime transfer that does not qualify as a potentially exempt transfer (PET) (IHTM04057) will be immediately chargeable to Inheritance Tax under IHTA84/S3 (1). Two transfers that do not qualify are a transfer into a relevant property trust, because the gift is not to an individual or one of the specified trusts, see IHTM04058 and transfer to a company, see example 2 at IHTM04060 There may also be an alternative charge on the property transferred under the gift with reservation rules. (IHTM
Types of excluded discretionary trusts known commonly as special trusts (or favoured trusts) are Temporary charitable trusts Protective trusts Trusts for disabled persons Employee and newspaper trusts Accumulation and maintenance trusts (A&M) prior to 22 March 2006. Other excluded trusts and property within IHTA84/S58 are Heritage Maintenance trusts Pension funds Trade or professional compensation funds Asbestos Compensation trusts Decommissioning Security trusts Excluded proper
It does not matter if the trustees, or some other person, has the power to alter the trusts, so that persons outside the specified classes in IHTA84/S86(1) could benefit. Nor does it matter if the existing trusts provide that other persons may benefit in the future. You must consider the trusts that actually apply to the settled property at the time the Inheritance Tax charge is being considered. If the trusts were altered in a way or if reversionary trusts came into operation which did not sat
PART III SETTLED PROPERTY CHAPTER III SETTLEMENTS WITHOUT INTERESTS IN POSSESSION , AND CERTAIN SETTLEMENTS IN WHICH INTERESTS IN POSSESSION SUBSIST Principal charge to tax Charge at ten-year anniversary. 64 1 Where immediately before a ten-year anniversary all or any part of the property comprised in a settlement is relevant property, tax shall be charged at the rate applicable under sections 66 and 67 below on the value of the property or part at that time. 1A For the purposes of subsection (1