Age 18-25 Trust and Inheritance Tax UK: How Section 71D IHTA 1984 Works
Parents who die leaving minor children often want assets held in trust past age 18, without subjecting the fund to full discretionary trust IHT charges. A section 71D trust achieves this — allowing the trust to run to age 25, with only a modest proportional exit charge if assets are distributed between 18 and 25.
Key point: no 10-year periodic charges
Unlike a standard discretionary trust, a s.71D age 18-25 trust faces no periodic (10-year) IHT charges. Exit charges apply only when assets are distributed between the young person’s 18th and 25th birthdays, and are proportional — often 1–3% of the fund rather than the full 6% relevant-property rate.
What is a section 71D trust?
Section 71D of the Inheritance Tax Act 1984 was introduced by the Finance Act 2006, which overhauled the IHT treatment of trusts for children. Before 2006, most trusts for children (known as accumulation and maintenance trusts) benefited from favourable IHT treatment regardless of the child’s age at vesting. After 2006, the rules tightened significantly: only trusts where a child takes an absolute interest at 18 qualify for the most favourable treatment (the bereaved minor trust under s.71A). If you want to extend the trust beyond 18 — say, to age 21 or 25 — you need the s.71D regime instead.
A s.71D trust operates in two phases:
Phase 1: birth to age 18
The trust is treated like a bereaved minor trust — no IHT charges at all (no periodic charges, no exit charges). Income must be applied for the child or accumulated.
Phase 2: age 18 to vesting (max 25)
The trust becomes a modified relevant-property trust. Periodic charges still do not apply, but a proportional exit charge arises when assets leave the trust between ages 18 and 25.
The four qualifying conditions
For a trust to qualify under s.71D, all four conditions must be satisfied throughout the trust’s life:
- Bereaved young person: A parent or step-parent of the beneficiary has died. The death must have given rise to the trust (typically through a will or intestacy).
- Age cap: The beneficiary has not yet reached age 25 when the property is settled into the trust.
- Absolute entitlement by 25: The trust terms must require the beneficiary to become absolutely entitled to the trust property on or before reaching age 25 — or on earlier death.
- Income applied for benefit: While the beneficiary is under 18, trust income must be applied for their benefit or accumulated. Income cannot be applied for the benefit of any other person.
If all four conditions are met, the trust qualifies as a s.71D trust from the date it is created (or from the date the young person’s parent dies, whichever is later) until the young person reaches 25 or the trust assets are distributed.
How the exit charge is calculated
The exit charge under s.71D applies when assets leave the trust after the young person reaches 18. The charge is calculated as follows:
Exit charge rate = (Q ÷ 40) × effective rate
Where Q = number of complete quarters elapsed since the young person’s 18th birthday
The effective rateis calculated by applying the relevant-property IHT rules as though the trust had been a discretionary trust from the young person’s 18th birthday. This involves:
- Adding the trust fund to any chargeable transfers made by the settlor in the 7 years before the trust was created
- Applying the nil-rate band in force at the time of the exit charge (£325,000 for 2026/27, frozen until April 2028)
- Calculating a notional chargeable transfer and applying 30% of the full IHT rate (i.e., 30% × 40% = 12% on the excess above the NRB, giving a maximum effective rate before proportionalisation of approximately 6% over 10 years)
Worked example
Tom’s father dies in June 2026, leaving £400,000 in a s.71D trust for Tom (aged 15). The trust provides for Tom to receive the fund at age 25. The trust fund grows to £500,000 by the time Tom reaches 23 in June 2034 (20 complete quarters after age 18).
Assuming the nil-rate band remains at £325,000 and the settlor made no prior chargeable transfers: the notional transfer is £500,000 − £325,000 = £175,000. IHT at 40% × 30% = 12% on £175,000 = £21,000. Effective rate = £21,000 ÷ £500,000 = 4.2%.
Exit charge rate = (20 ÷ 40) × 4.2% = 2.1%. IHT on exit = 2.1% × £500,000 = £10,500. Compared with the full relevant-property charge that a discretionary trust would face over the same period, this is a substantial saving.
Comparing trust options for bereaved children
| Trust type | Vesting age | Periodic charges | Exit charges | Best for |
|---|---|---|---|---|
| Bereaved minor trust (s.71A) | At 18 | None | None | Zero IHT cost — child gets assets at exactly 18 |
| Age 18-25 trust (s.71D) | 18 to 25 | None | Proportional exit charge if distributed between 18-25 (typically 1-3%) | Delay vesting to 25 with modest IHT cost |
| Discretionary trust | Any age | Up to 6% every 10 years | Proportional exit charge applies from day one | Maximum flexibility; higher IHT cost |
| Bare trust | At 18 by law | None | None (PET on creation if over NRB) | Simple structures; child has absolute right from creation |
Drafting a section 71D trust in your will
Most parents use their will to create a s.71D trust for their children. The key drafting points are:
- Name the vesting age: Choose an age between 18 and 25 (commonly 21 or 25). The trust must vest the property absolutely by that age — not at trustee discretion.
- Identify the beneficiaries: Typically “my children” or “my child [name]”. The trust can cover multiple children, with each child’s share vesting separately at the specified age.
- Income provisions: The will must direct that income is applied for each child’s maintenance, education and benefit while they are under 18, or accumulated. This mirrors the statutory power of maintenance under s.31 Trustee Act 1925 but should be set out expressly.
- Advancement powers: Consider whether trustees should have power to advance capital before the vesting age for education, housing, or business purposes. This is separate from income and must be expressly granted.
- Appointment of trustees: Choose trustees carefully — they will have control of significant assets for up to 25 years. Consider professional trustees or a trust corporation for larger funds.
- Residue provisions: What happens if the child dies before reaching the vesting age? The will should specify whether their share passes to their estate, to the other children, or on substitutionary terms.
What happens if the trust loses s.71D status?
A trust can lose its s.71D status if the terms are varied so that the young person no longer becomes absolutely entitled by age 25, or if income is applied for another person while the young person is under 18. If s.71D status is lost, the trust falls into the full relevant-property regime from the date it lost its qualifying status — meaning:
- Periodic (10-year anniversary) charges apply from the next 10-year anniversary after the trust lost s.71D status
- Exit charges apply whenever assets leave the trust, based on the quarters elapsed since the most recent 10-year anniversary (or since the trust began, if no anniversary has passed)
- The transition is treated as an exit from s.71D, so a proportional exit charge may also arise at that point
It is therefore important to take legal advice before varying the terms of a s.71D trust — particularly if the variation is intended to extend the vesting age beyond 25 or to benefit other family members.
Income tax treatment of a section 71D trust
The income tax treatment of a s.71D trust changes when the young person reaches 18:
While under 18
Trust income is taxed at the trust rate (45% on non-dividend income; 39.35% on dividends). There is a £500 standard-rate band. Trustees must file a Trust and Estate Tax Return (SA900).
After turning 18
The young person has a vested interest in income. Income is taxed at their personal rates (not the trust rate), because they are beneficially entitled to it. This is a significant advantage over a discretionary trust.
Frequently asked questions
What is an age 18-25 trust for inheritance tax purposes?
An age 18-25 trust is a trust that qualifies under section 71D of the Inheritance Tax Act 1984 (IHTA). It allows a child who has lost a parent or step-parent to hold inherited assets in trust beyond age 18 — up to a maximum of age 25 — without the trust being subject to the full relevant-property IHT regime. Under normal rules, a discretionary trust faces a 10-year periodic charge (up to 6% of the fund) and an exit charge whenever assets leave the trust. A s.71D trust avoids periodic charges entirely, and limits exit charges to a proportional fraction of the relevant-property rate, calculated by reference to the number of complete quarters the trust has run since the young person turned 18.
Who qualifies for a section 71D age 18-25 trust?
To qualify under s.71D IHTA 1984, four conditions must all be met. First, a parent or step-parent of the young person must have died. Second, the property must be held on trust for a person (the 'young person') who has not yet reached the age of 25 at the time the trust is created or the property is settled. Third, the trust terms must provide that the young person becomes absolutely entitled to the trust property — or dies — before reaching age 25. Fourth, while the young person is under 18 and the trust is in existence, the trust income must be applied for the young person's benefit, or accumulated. If all four conditions are satisfied, the trust qualifies for the special s.71D treatment from the time the young person reaches 18 until they reach 25 (or the property is distributed earlier).
How is the exit charge calculated for a section 71D trust?
The exit charge under s.71D applies when trust property is distributed to the young person (or transferred out of the trust) between the ages of 18 and 25. The charge is calculated as a proportion of the full relevant-property exit rate: Rate = (number of complete quarters since the young person's 18th birthday ÷ 40) × effective rate. The effective rate is determined by applying the relevant-property IHT rules as though the trust had been a discretionary trust since the young person turned 18, using the nil-rate band in force at the time of the exit and taking into account any chargeable transfers made in the 7 years before the trust was created. In practice, because the trust is subject to a maximum of 28 quarters (7 years × 4) between ages 18 and 25, and the maximum effective rate is 20% (since the IHTA 1984 relevant-property rate is 30% × 20% = 6% per 10 years, proportionalised), the actual exit charges are almost always modest — often less than 1–2% of the fund.
What is the difference between a bereaved minor trust and an age 18-25 trust?
Both trust types are designed for children who have lost a parent. A bereaved minor (BM) trust under s.71A IHTA 1984 has no IHT charges at all — no exit charges and no periodic charges — provided the child becomes absolutely entitled at age 18. If the will or trust deed delays entitlement beyond 18, the BM trust loses its status at the child's 18th birthday and the trust falls into the relevant-property regime — unless it qualifies as a s.71D trust instead. In practice: (1) If you want zero IHT cost, use a BM trust with entitlement at 18. (2) If you want to extend the trust to 25 for asset-protection or maturity reasons, use a s.71D trust — it imposes a modest exit charge between 18 and 25 but avoids 10-year periodic charges. (3) A standard discretionary trust offers maximum flexibility but faces both periodic and exit charges from day one.
Can I set up a section 71D trust in my will?
Yes — and for most parents with minor children, a s.71D trust (or a bereaved minor trust) in the will is strongly preferable to leaving assets outright at 18 or placing them in a full discretionary trust. To create a valid s.71D trust in your will, the trust terms must: (a) identify the beneficiary by name or class (your children), (b) provide that each child becomes absolutely entitled to their share of the trust fund on reaching a specified age of not more than 25, or on earlier death, and (c) require that trust income is applied for the child's benefit or accumulated while they are under 18. Your solicitor can draft the relevant provisions. The trust typically takes effect on your death, with your executors becoming the first trustees. You should also consider who will act as trustee, and whether the trust deed should give trustees power to advance capital for education or maintenance before the child reaches the vesting age.
Are there income tax consequences for a section 71D trust?
Yes. While the young person is under 18, income accumulated within a s.71D trust is taxed at the trust rate — currently 45% on income and 39.35% on dividends — with a small standard-rate band of £500 (2026/27). When income is distributed or the young person reaches 18, the trust becomes a 'trust for a bereaved young person' for income tax purposes, and the income tax treatment changes: income arising to the trust after the young person reaches 18 is generally taxed at the beneficiary's personal rates (not the trust rate), because the young person has a vested interest in the income. This can be a significant advantage compared with a discretionary trust, where all income continues to be taxed at the trust rate regardless of the beneficiary's personal position.
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