Discretionary Trust Exit Charge UK (2026): When IHT Is Charged When Property Leaves a Discretionary Trust

A discretionary trust exit charge is an IHT charge that arises under IHTA 1984 s.65 when property leaves the relevant property regime of a discretionary trust: (1) THE RELEVANT PROPERTY REGIME: discretionary trusts (and most trusts that are not IPDIs, disabled person's interests, or bereaved minor's trusts) are subject to the 'relevant property' IHT regime. This regime has two types of charge: (a) the periodic charge (IHTA 1984 s.64) — IHT charged at up to 6% of the trust fund value on each 10-year anniversary of the trust; (b) the exit charge (IHTA 1984 s.65) — IHT charged when property LEAVES the relevant property regime between 10-year anniversaries; (2) WHAT TRIGGERS AN EXIT CHARGE: an exit charge arises when: (a) property is distributed outright to a beneficiary (the property leaves the trust entirely); (b) property is appointed to a beneficiary on qualifying trusts (e.g. an interest in possession for a beneficiary — the property leaves the discretionary trust into an IPDI or other qualifying interest in possession); (c) a beneficiary's interest in the trust fund is varied or enlarged in a way that takes assets out of the relevant property regime; (d) the trust is wound up and assets distributed; (3) WHAT DOES NOT TRIGGER AN EXIT CHARGE: (a) distributions of income to beneficiaries (income distributions are not capital; exit charges only apply to capital leaving the trust); (b) payment of trust expenses; (c) asset substitutions (swapping one trust asset for another of equivalent value); (d) loans from the trust (if structured correctly as genuine loans repayable to the trust — the asset remains within the trust); (4) THE RATE — PROPORTIONATE TO THE PERIODIC CHARGE: the exit charge rate is NOT the full 6% periodic charge rate. It is a fraction of the effective rate, reflecting the proportion of the 10-year period elapsed since the last anniversary (or since the trust was established, if before the first anniversary). The maximum exit charge is therefore 6% (which would apply only if assets left exactly at a 10-year anniversary — but in practice the exit charge applies between anniversaries and is therefore always less than 6%); (5) EXIT CHARGES AND DEEDS OF APPOINTMENT: many trustees make appointments from discretionary will trusts to direct beneficiaries using a deed of appointment. This is the most common context in which practitioners encounter exit charges — they must calculate whether an exit charge applies before making an appointment.

The exit charge calculation is set out in IHTA 1984 ss.65-66 and uses a multi-step formula: (1) IDENTIFY WHEN THE CHARGE ARISES: determine whether the exit is: (a) BEFORE the first 10-year anniversary — a 'proportionate charge' at a notional rate; or (b) AFTER the first 10-year anniversary — a charge based on the last periodic charge effective rate and the quarters elapsed since the last anniversary; (2) EXIT CHARGE BEFORE THE FIRST 10-YEAR ANNIVERSARY — s.65(5)/(6): (a) calculate the 'hypothetical' periodic charge rate — the IHT that would have arisen if the chargeable transfer at the time the trust was settled had been charged at entry as if it were a chargeable lifetime transfer. The settlor's IHT cumulative total at the date of settlement is relevant; (b) apply: 30% × (hypothetical effective rate) = the maximum notional rate; (c) apportion by the number of complete quarters elapsed since the trust was settled, divided by 40 (i.e. 10 years × 4 quarters). Exit charge rate = (quarters elapsed / 40) × the notional rate; (d) apply this rate to the VALUE of the property leaving the trust; (3) EXIT CHARGE AFTER THE FIRST 10-YEAR ANNIVERSARY — s.65(3): (a) take the 'effective rate' used at the most recent 10-year anniversary (from the IHT account at that anniversary); (b) 30% × (last effective periodic rate) = the exit rate before apportionment; (c) apportion: (quarters elapsed since last anniversary / 40) × exit rate; (d) apply this rate to the VALUE of the property leaving the trust; (4) WORKED EXAMPLE (AFTER FIRST ANNIVERSARY): periodic charge rate at last 10-year anniversary: 5% (effective rate). 30% × 5% = 1.5%. Quarters elapsed since last anniversary: 8 (i.e. 2 years). Exit charge rate = (8/40) × 1.5% = 0.3%. Trust fund value at exit: £500,000. Exit charge: £500,000 × 0.3% = £1,500. In practice, most exit charges on modest-sized discretionary will trusts are very small — often in the hundreds of pounds or nil if the fund size is below the NRB; (5) THE NRB AND EXIT CHARGES: many discretionary will trusts have a fund value below the NRB (currently £325,000). Where the trust fund is within the NRB at the 10-year anniversary, the effective periodic charge rate is nil — and consequently the exit charge is also nil. This is why many professional wills create 'NRB discretionary trusts' — the trust fund (equal to the NRB at death) generates nil periodic and exit charges because it never exceeds the NRB.

Discretionary will trusts created on death have a specific starting position for the exit charge calculation that differs from lifetime trusts: (1) CREATION OF THE TRUST: a discretionary will trust is established at the date of the deceased's death. No IHT is payable on creation — the trust is funded out of the death estate which is itself subject to IHT. The trust fund enters the relevant property regime at date of death; (2) THE NOTIONAL CHARGEABLE TRANSFER: for the purposes of calculating the notional periodic charge rate (and therefore the exit charge before the first 10-year anniversary), the deemed chargeable transfer on creation is the value of the assets settled into the trust. However, because the deceased's NRB and accumulated chargeable transfers are taken into account, many small-to-medium discretionary will trusts have a notional rate of nil at this stage; (3) PRACTICAL POSITION FOR NRB DISCRETIONARY WILL TRUSTS: the 'nil rate band discretionary trust' — a trust funded with assets equal to the available NRB at death — is specifically designed so that: (a) the trust fund at creation does not exceed the NRB; (b) the hypothetical chargeable transfer is within the NRB; (c) the notional rate is nil; (d) exit charges and periodic charges are nil. Appointments from an NRB discretionary will trust in the period before the first 10-year anniversary therefore typically carry nil exit charge; (4) TIMING OF APPOINTMENTS — WHY TRUSTEES OFTEN ACT QUICKLY: some practitioners recommend that trustees of a discretionary will trust make appointments to beneficiaries within 2 years of death: (a) a deed of variation under IHTA 1984 s.142 can redirect assets within 2 years with the effect that the deceased is treated as having made the gift — it is treated as the deceased's own disposition, not a trust distribution; (b) a deed of appointment within 2 years under IHTA 1984 s.144 has a similar effect for testamentary discretionary trusts — the distribution is treated as if it had been made directly under the will, avoiding exit charges entirely; (5) s.144 APPOINTMENTS — THE 2-YEAR RULE: IHTA 1984 s.144 provides that where trustees of a discretionary will trust exercise their discretionary powers of appointment within 2 years of death, the appointment is treated as if it had been part of the original will. This means: (a) no exit charge applies on the appointment; (b) the IHT position is as if the will had made the gift directly. Trustees of discretionary will trusts should always consider whether s.144 appointments are appropriate before the 2-year window closes.

Exit charges can be eliminated or minimised through careful planning and timing: (1) KEEP THE FUND WITHIN THE NRB — THE PRINCIPAL PLANNING TOOL: if the trust fund value (aggregated with previous chargeable transfers in the 7 years before settlement) is within the NRB at the 10-year anniversary, the effective periodic charge rate is nil. Consequently, exit charges between anniversaries are also nil. Many practitioners advise creating NRB-sized discretionary will trusts specifically to avoid charges; (2) s.144 APPOINTMENTS WITHIN 2 YEARS OF DEATH: as described above, appointments from a testamentary discretionary trust within 2 years of death are read back into the will under IHTA 1984 s.144 — no exit charge arises. Trustees should review whether it is appropriate to make appointments within the 2-year window; (3) TIME APPOINTMENTS SHORTLY AFTER 10-YEAR ANNIVERSARIES: if assets must leave the trust after the first 10-year anniversary, appointing shortly AFTER (rather than before) the anniversary means the quarterly apportionment factor is small (1/40 or 2/40 etc.) — giving the lowest possible exit charge for that 10-year period; (4) MAKE LOANS RATHER THAN OUTRIGHT APPOINTMENTS: the trust can lend assets to beneficiaries on interest-free terms (a 'trust loan') rather than appointing outright. The asset remains in the trust (no exit charge); the beneficiary has use of the asset. The trust has a loan receivable. This must be a genuine loan with proper documentation; (5) INCOME ONLY — AVOID CAPITAL APPOINTMENTS: distributing income to discretionary beneficiaries does not trigger exit charges. If the beneficiary's needs can be met from trust income rather than capital, no exit charge arises; (6) CONVERT TO AN IPDI: if appropriate, the trustees can exercise a power to appoint property on an interest in possession for a beneficiary (converting the discretionary interest to an IPDI). Depending on the specific provisions, this may or may not trigger an exit charge — specialist advice should be taken. If the appointment is to the settlor's spouse/civil partner on an IPDI, the spousal exemption may apply to eliminate the exit charge on the appointment.

Exit charges must be reported and paid within specific deadlines: (1) REPORTING — FORM IHT100: trustees must report the exit charge to HMRC using form IHT100 (specifically IHT100c — the exit charge return). The form must be submitted: (a) within 6 months of the end of the month in which the exit occurred (i.e. 6 months after the exit event); (b) for example: exit in March 2026 — IHT100c due by 30 September 2026; (2) PAYMENT — 6-MONTH DEADLINE: IHT on exit charges is due within 6 months of the end of the month of the exit. Interest runs on unpaid IHT after this deadline; (3) THE DE MINIMIS — EXCEPTED SETTLEMENTS: HMRC regulations (Inheritance Tax (Delivery of Accounts) (Excepted Settlements) Regulations 2008) exempt certain trusts from the full IHT100 reporting obligation where: (a) the trust was established by a UK-domiciled settlor; (b) all the trust property consists of cash or readily realisable assets; (c) the value of the trust fund has never exceeded 80% of the NRB; (d) no property has been added to the trust since it was settled. Qualifying 'excepted settlements' submit a simpler calculation rather than full IHT100; (4) NO REPORTING IF NIL CHARGE: where the exit charge calculation produces nil IHT (because the notional rate is nil, or the fund is within the NRB), no IHT100 needs to be filed — but the trustees should keep a calculation on file demonstrating why no charge arose; (5) PROFESSIONAL ADVICE FOR COMPLEX CALCULATIONS: the exit charge calculation can be complex — particularly before the first 10-year anniversary, where the settlor's IHT history and cumulative chargeable transfers affect the notional rate. Where trustees are unsure, specialist IHT advice should be taken before the exit occurs. Making an appointment and then discovering an unreported exit charge incurs interest and potentially penalties.