Inheritance tax on trusts in the UK is governed mainly by the Relevant Property Regime, which can impose three separate charges: up to 20% when assets are settled into the trust, up to 6% every ten years while they stay there, and a proportionate exit charge when assets are paid out. The tax-free nil rate band sits at £325,000 and is frozen at that figure through at least April 2030. From 6 April 2026, 100% Business Property Relief and Agricultural Property Relief are capped at a combined £2.5 million, with only 50% relief above that.
Which Trusts the Regime Applies To
The Relevant Property Regime applies to settled property where no one holds a qualifying interest in possession. In practice that covers most discretionary trusts and most interest-in-possession trusts created on or after 22 March 2006, when the Finance Act 2006 brought the majority of new settlements within the charging framework.1HM Revenue & Customs. Inheritance Tax Manual – IHTM16061 – Interests in Possession: Finance Act 2006 and the New Trust Regime2Legislation.gov.uk. Finance Act 2006 The trust itself, through the trustees, bears the tax rather than the beneficiaries, and the trustees pay any charges from the trust fund.
Section 58 of the Inheritance Tax Act 1984 carves several categories of settled property out of the definition of relevant property.3Legislation.gov.uk. Inheritance Tax Act 1984 – Section 58 Charitable trusts, bereaved minors trusts under section 71A, age 18-to-25 trusts under section 71D, disabled persons trusts under sections 74 or 89, immediate post-death interests under section 49A, registered pension scheme property, and excluded property (such as certain overseas assets held by non-UK domiciled settlors) are all outside the regime. Bare trusts also sit outside it, because the assets are treated as belonging to the beneficiary directly. If a trust falls into one of these categories, the ten-year and exit charges described below do not apply.
Entry Charge on Lifetime Transfers
Putting assets into a relevant property trust during your lifetime is a chargeable lifetime transfer. Anything above your available nil rate band of £325,000 is taxed at 20%, which is half the 40% death rate.4GOV.UK. Inheritance Tax Thresholds and Interest Rates5Legislation.gov.uk. Inheritance Tax Act 1984 – Section 7 The nil rate band is frozen at £325,000 through at least April 2030 with no inflation adjustment.
Your available nil rate band is not always the full amount. Any chargeable transfers in the previous seven years eat into it. Put £200,000 into a trust three years ago and only £125,000 of the band is left for a new transfer today.
There is a second trap. If the settlor pays the tax personally rather than having the trustees settle it from the trust fund, the tax payment itself counts as an additional gift to the trust. The transfer has to be grossed up to include the tax, pushing the effective rate from 20% to 25% on the net amount given. Trustees paying the bill from the fund avoids this.
If the Settlor Dies Within Seven Years
The 20% lifetime charge is not necessarily the end of it. If the settlor dies within seven years of the transfer, HMRC recalculates the tax at the 40% death rate. The trust receives credit for the 20% already paid, and the personal representatives pay the difference from the estate.6GOV.UK. Trusts and Inheritance Tax
Where the settlor survives at least three years, taper relief scales down the recalculated tax:5Legislation.gov.uk. Inheritance Tax Act 1984 – Section 7
- 3 to 4 years before death: 80% of the full rate applies.
- 4 to 5 years: 60% of the full rate.
- 5 to 6 years: 40% of the full rate.
- 6 to 7 years: 20% of the full rate.
Taper only helps if the recalculated tax exceeds what was originally paid at 20%. There is no refund if the tapered figure falls below the lifetime charge already settled. Once seven full years pass, the transfer drops out of the settlor’s cumulative total and their nil rate band is freed up for future gifts.
A separate rule catches gifts with reservation of benefit. If the settlor keeps benefiting from the transferred property, for example by continuing to live rent-free in a house they gave away, the asset stays in their estate for inheritance tax. The legislation prevents double taxation by applying only the higher of the two possible charges, but the planning advantage is lost.6GOV.UK. Trusts and Inheritance Tax
The Ten-Year Anniversary Charge
Every ten years from the date the trust was set up, trustees value the relevant property in the settlement and pay a periodic charge under sections 64, 66, and 67 of the Inheritance Tax Act 1984.7Legislation.gov.uk. Inheritance Tax Act 1984 – Section 64 The maximum effective rate is 6%, derived from 30% of the 20% lifetime rate.
Most trusts pay less than 6% because the calculation gives credit for the nil rate band available at the anniversary. Only the value of the trust fund exceeding the band is charged. A trust holding £600,000 of relevant property in 2026 would be taxed on £275,000 (the excess over £325,000), producing a maximum charge of £16,500 before reliefs.
Trustees report the charge on form IHT100d and must pay within six months of the chargeable event.8GOV.UK. Tell HMRC That Inheritance Tax Is Due on the 10 Year Anniversary of a Trust – IHT100d9GOV.UK. Tell HMRC That Inheritance Tax Is Due on a Gift or Trust (IHT100) Getting the valuation wrong or filing late can trigger penalties and interest, so professional valuations of property, unquoted shares, and other illiquid assets are common at anniversary time.
The Exit Charge on Distributions
When assets leave a relevant property trust, whether by distribution to a beneficiary or transfer out for any other reason, an exit charge (also called the proportionate charge) arises under section 65 of the Inheritance Tax Act 1984.10Legislation.gov.uk. Inheritance Tax Act 1984 – Section 6511HM Revenue & Customs. Inheritance Tax Manual – IHTM42110 – Proportionate Charges: Introduction
The rate depends on how many complete three-month periods (quarters) have passed since either the trust’s creation or the most recent ten-year anniversary, whichever is later. It is a fraction of the rate that was, or would have been, charged at the last ten-year point, scaled to reflect how long the property was in the trust during that decade. A distribution two years after an anniversary carries a smaller charge than one made nine years in. The amount charged reflects the reduction in the trust fund’s value, not the market value of the asset itself, a distinction that matters when distributions carry conditions or encumbrances.
One narrow exception under section 65(4): no exit charge applies to distributions made in the same quarter as the trust’s creation or a ten-year anniversary. That window is only three months wide, but for trustees planning a large distribution around an anniversary date, hitting it can eliminate the charge entirely.
Business Property Relief and Agricultural Property Relief
Two reliefs can dramatically reduce or eliminate the inheritance tax on qualifying trust assets. Business Property Relief sits in sections 103 to 114 of the Inheritance Tax Act 1984 and Agricultural Property Relief in sections 115 to 124.12Legislation.gov.uk. Inheritance Tax Act 1984 The trust must have owned the qualifying asset for at least two years before the chargeable event.13HM Revenue & Customs. SVM111060 – IHT Business Property Relief: Minimum Period of Ownership
Business Property Relief covers interests in qualifying businesses, including sole trades, partnership interests, and shares in unquoted trading companies. The base rate is 50%, but qualifying interests in a business or partnership and unquoted company shares can attract 100% relief, wiping out the charge on those assets.14Legislation.gov.uk. Inheritance Tax Act 1984 – Section 104 Agricultural Property Relief covers the agricultural value of farmland, farm buildings, and farmhouses that are part of a working operation. The base rate is again 50%, with 100% available where the transferor had the right to vacant possession or where the land is let on tenancies beginning after September 1995.15Legislation.gov.uk. Inheritance Tax Act 1984 – Section 116
The £2.5 Million Cap From 6 April 2026
From 6 April 2026, 100% relief is capped. A new combined allowance of £2.5 million applies to the total value of property qualifying for 100% Business Property Relief and 100% Agricultural Property Relief, whether held in an estate or in trusts. Any qualifying value above £2.5 million receives only 50% relief.16GOV.UK. Agricultural Property Relief and Business Property Relief Changes The government first announced a £1 million cap at Autumn Budget 2024, then raised it to £2.5 million in December 2025.17House of Commons Library. Changes to Agricultural and Business Property Reliefs for Inheritance Tax
For a trust holding £4 million of qualifying unquoted shares, the first £2.5 million would get 100% relief and the remaining £1.5 million only 50%. At a 6% maximum ten-year charge, the taxable slice of that £1.5 million after the 50% reduction would be £750,000. Before April 2026, the whole £4 million could qualify for full relief with no cap. Trustees holding substantial farming or business assets should review positions before the new rules bite.
Planning Around the Charges
Because chargeable transfers drop out of the cumulative total after seven years, a settlor can restore the full nil rate band by leaving at least seven years between transfers into trusts. Put £325,000 into a trust in 2026, wait until 2033, and settle another £325,000, and neither transfer triggers an entry charge. Stack them closer together and the second gift exceeds the available band and attracts 20% on the excess.
Timing distributions matters too. Because exit charges scale by completed quarters, distributing shortly after a ten-year anniversary produces a smaller proportionate charge than waiting until year nine of the next cycle. Distributions in the same quarter as the trust’s creation or a ten-year anniversary escape the exit charge altogether under section 65(4).10Legislation.gov.uk. Inheritance Tax Act 1984 – Section 65
Pilot trusts, once used to multiply nil rate bands across several small trusts funded later by will, were largely closed down by the Finance (No.2) Act 2015 for charges arising on or after 18 November 2015. Trusts created before 10 December 2014 may still get the older treatment, but for anyone setting one up now the tax savings are minimal.
Whatever the strategy, trustees have six months from a chargeable event to pay the tax due, using the IHT100 suite of forms.9GOV.UK. Tell HMRC That Inheritance Tax Is Due on a Gift or Trust (IHT100) Miss the deadline and interest accrues; penalties can follow where HMRC considers the failure deliberate or careless. Accurate records of asset values, additions to the trust, and every distribution are the foundation of every calculation described above.