What is a lifetime gift into a discretionary trust?
Answered 17 March 2026
Lifetime Gift into a Discretionary Trust
What the law says
A chargeable transfer is defined under IHTA 1984 s.2(1) as "a transfer of value which is made by an individual but is not (by virtue of Part II of this Act or any other enactment) an exempt transfer."
A discretionary trust is a Relevant Property Trust. Where property is transferred by an individual into such a settlement during their lifetime on or after 22 March 2006, it is a chargeable transfer — not a Potentially Exempt Transfer (PET).
HMRC guidance / practice
Nature of the transfer
A lifetime gift into a discretionary trust is an immediately chargeable transfer — meaning IHT can be due at the time of the gift, not just on death. Unlike a gift to an individual (which is a PET and only becomes chargeable if the donor dies within 7 years), a gift to a discretionary trust is chargeable when made.
IHT rate on entry
The lifetime IHT rate is 20% (half the 40% death rate), applied to the value of the transfer that exceeds the available nil rate band (currently £325,000), after taking into account any other chargeable transfers made in the preceding 7 years.
Worked example: Bob transferred £250,000 into a discretionary trust on 1 April 2010. His previous chargeable transfers within 7 years totalled £80,000. The cumulative total of £330,000 exceeded the nil rate band of £325,000 by £5,000. Tax at 20% = £1,000 payable on entry.
Ongoing charges within the trust
Once assets are inside the discretionary trust, the Relevant Property regime applies three further charges:
| Charge | Trigger | Statutory basis |
|---|---|---|
| Ten-year anniversary (principal) charge | Every 10th anniversary of the trust's creation | IHTA 1984 s.64 |
| Exit / proportionate charge | When property leaves the trust (before or after the first 10-year anniversary) | IHTA 1984 s.65 |
The exit/proportionate charge rate can be up to 6% of the value distributed.
The ten-year and exit charges do not apply to certain "special trusts" (e.g. trusts for disabled persons, employee trusts, pension funds), which fall outside the relevant property regime.
In summary: A lifetime gift into a discretionary trust is an immediately chargeable transfer subject to IHT at 20% on entry (to the extent the value exceeds the available nil rate band), followed by ongoing ten-year anniversary and exit charges on the trust property — distinguishing it fundamentally from a PET made to an individual.
Citation sources
Mr B transfers his 500 shares in his family company to a discretionary trust. You are asked to consider the value of the shares for CGT purposes. Although business relief may be available, a gift to a discretionary trust is not a PET, so you should advise WMBC Assets to discuss with their IHT specialists, giving full details including an estimate of value and whether business relief will be available. [On or after 22 March 2006, almost all transfers into trust (whether the trust is a discretiona
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Bob transferred £250,000 into a discretionary trust on 1 April 2010. Bob had previously made the following transfers Feb 2003, £30,000 to a discretionary trust May 2006, £80,000 to a discretionary trust July 2008, £60,000 to a friend. You calculate the lifetime tax (IHTM14534) on the April 2010 transfer on the basis of Previous chargeable transfers = £80,000 April 2010 transfer + £250,000 Total = £330,000 The Feb 2003 transfer is omitted from the previous lifetime transfers because it is outside
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