Discretionary Trust Periodic Charge UK 2026: 10-Year IHT Charge Calculation Guide

Discretionary trusts are subject to inheritance tax every 10 years under the relevant property regime — a system of periodic charges and exit charges introduced by the Finance Act 1984. Unlike the simpler IHT rules that apply to individuals, trust IHT involves calculating a notional transfer at a deemed rate, applying a fraction of that rate to the trust value, and reporting to HMRC even in years where no tax is due. Getting the calculation right — and keeping contemporaneous records — matters enormously.

The Relevant Property Regime: Overview

Property held in a discretionary trust is "relevant property" for IHT purposes (IHTA 1984 ss.58–85). The regime imposes two types of charge:

• Periodic charge (10-year anniversary charge) — charged at each 10-year anniversary of the date the trust was created (s.64 IHTA 1984)
• Exit charge (proportionate charge) — charged when property leaves the trust between 10-year anniversaries (ss.65–69 IHTA 1984)

The rate is capped at 6% of the value of relevant property above the available nil-rate band. Many trusts pay nothing — because their value is below the NRB — but trustees must still keep records and may need to file IHT100.

Step-by-Step: Calculating the Periodic Charge

Step 1: Identify the Relevant Property

Value all property held in the trust at the 10-year anniversary date. Exclude:

• Property held on a qualifying interest in possession (life interest) — not relevant property
• Property held for a disabled person under s.89 IHTA 1984
• Property held on a bereaved minor trust or age-18-to-25 trust
• Excluded property (e.g. foreign situs assets where settlor was non-UK domiciled)
• Property subject to an immediate post-death interest (IPDI)

Step 2: Calculate the Available Nil-Rate Band

The NRB available to the trust is the current NRB (£325,000) reduced by:

• Settlor's cumulative CLTs in the 7 years before the trust was established — gifts to other trusts or other chargeable lifetime transfers in those 7 years reduce the NRB available at the time of settlement. This figure is frozen at the time of settlement and not recalculated at each 10-year charge.
• Property in related settlements — trusts created by the same settlor on the same day as this trust share one NRB.

Note: the NRB used is the current NRB at the anniversary date, not the NRB when the trust was set up — so if the NRB increases, the trust benefits from the higher threshold. (The NRB is currently frozen at £325,000 until April 2030.)

Step 3: Notional Transfer and Effective Rate

HMRC requires a notional calculation: assume the trustees make a chargeable transfer equal to the relevant property on the anniversary date. Apply the IHT lifetime rate of 20% to the value above the available NRB. Then multiply by 30% to arrive at the effective rate.

In formula terms:

The 30% multiplier reflects that the periodic charge applies every 10 years (which is 30% of 40 quarters in a decade — though the calculation is presented as a conceptual step rather than a pure quarter-count).

Step 4: Actual Rate

The actual rate is the effective rate adjusted for any quarters during which the property was not in the trust. If some property was added to the trust after the last 10-year anniversary, that property is charged at a fraction of the full rate (scaled by the number of complete quarters it was in the trust / 40).

Step 5: Tax Due

Tax due = Actual rate × Value of relevant property (at anniversary date)

The maximum tax is 6% of the value above the available NRB. Any value below the NRB is chargeable at nil.

Worked Example

The Archer Family Discretionary Trust was created on 1 June 2016 with an initial transfer of £500,000. The settlor had made no previous CLTs. On 1 June 2026 (the first 10-year anniversary) the trust holds investments worth £650,000.

1. Relevant property: £650,000
2. Available NRB: £325,000 (settlor had no prior CLTs in 7 years before 2016)
3. Excess over NRB: £650,000 − £325,000 = £325,000
4. Notional tax at 20%: £325,000 × 20% = £65,000
5. Effective rate: £65,000 / £650,000 × 30% = 10% × 30% = 3%
6. Tax due: 3% × £650,000 = £19,500

If the entire £650,000 had been in the trust for all 40 quarters since 2016, the actual rate equals the effective rate and the tax is £19,500. This is well below the maximum of 6% (£19,500 vs a maximum of £325,000 × 6% = £19,500 in this case — here the effective rate happens to equal the maximum because the notional transfer is exactly double the NRB and the 30% multiplier produces the same result).

Exit Charges: When Property Leaves the Trust

When trustees distribute capital to a beneficiary, advance capital, or otherwise remove property from the trust between 10-year anniversaries, an exit charge applies under s.65 IHTA 1984.

Calculating the Exit Charge

Exit charge rate = (Last periodic charge effective rate × Quarters since last anniversary) / 40

Where no periodic charge has yet arisen (the trust is in its first 10 years), the exit charge is based on a notional calculation using the settlor's circumstances at the date of settlement.

Example: Exit Charge in Year 3

Using the Archer Trust above (first anniversary charge effective rate 3%), the trustees make a distribution of £100,000 in September 2028 — 9 quarters after the June 2026 anniversary.

Exit charge rate: (3% × 9 quarters) / 40 = 0.675%

Exit charge: 0.675% × £100,000 = £675

HMRC Reporting: Form IHT100

Trustees must file IHT100 with HMRC to report:

• Periodic charges (10-year anniversaries) — even where tax is nil, if value exceeds 80% of the available NRB
• Exit charges — where tax is due
• When the trust ends or ceases to exist

The IHT100 must be filed within 12 months of the chargeable event. Tax is due within 6 months of the end of the month in which the event occurred. Late filing attracts a fixed £100 penalty and daily penalties after 3 months (up to £60/day for serious delay).

Trustees should retain contemporaneous valuations of trust assets, records of all additions and distributions, and copies of IHT100 filings. HMRC can enquire into trust returns for up to 4 years (20 years for deliberate understatement).

Reliefs That Can Reduce the Periodic Charge

Certain reliefs can significantly reduce the value of relevant property:

• Business Property Relief (BPR) — 100% (from April 2026, capped at £1m combined with APR) on qualifying unquoted trading company shares, business interests, or AIM shares held >2 years
• Agricultural Property Relief (APR) — 100% (same £1m cap from April 2026) on qualifying agricultural land and buildings occupied for agricultural purposes
• Charitable exemption — assets held on trust for charity are not relevant property

From April 2026, the combined BPR and APR relief is capped at £1,000,000 per person — including trusts. Trustees whose trusts hold qualifying business or agricultural assets should review whether the cap affects their position.

When Is a Discretionary Trust Used in a Will?

Many wills create discretionary trusts for one or more of the following reasons:

• Flexibility to accommodate beneficiaries whose needs are unknown at the time of will writing (minor children, vulnerable adults)
• IHT planning — nil-rate band discretionary trusts to maximise use of the deceased's NRB on the first death
• Asset protection — keeping capital from divorcing beneficiaries or creditors
• Second families — ensuring children from a first marriage benefit alongside a surviving spouse

Anyone using a discretionary trust in their will should ensure the trustees understand the periodic charge obligations from day one — a trust can accumulate 10 years of records before the first charge falls due, and retrospective reconstruction of values is difficult.

Frequently Asked Questions