18-to-25 Trust and IHT: Section 71D IHTA 1984 — Bereaved Young Persons Trusts, Exit Charges, and Planning
A s71D 18-to-25 trust lets a bereaved young person's inheritance be held until they reach 25, rather than forcing vesting at 18. The trade-off: a reduced IHT exit charge of up to 4.2% when capital is paid between 18 and 25. For parents who want to delay a large inheritance until the child is more mature, the modest exit charge is often worthwhile.
Bereaved Minors Trust vs 18-to-25 Trust
| Feature | Bereaved Minors Trust (s71A) | 18-to-25 Trust (s71D) |
|---|---|---|
| Statutory basis | Section 71A IHTA 1984 | Section 71D IHTA 1984 |
| Who qualifies | Child of a deceased parent, under 18 when parent died | Same — child whose parent died when child was under 18 |
| Age at which trust must vest | By age 18 (no later) | By age 25 (can delay past 18, up to 25) |
| IHT exit charge on vesting | None — no exit charge when vesting at 18 | Yes — exit charge applies on vesting between ages 18-25 |
| 10-year periodic charge | None while trust qualifies | None while trust qualifies under s71D |
| Income tax on trust income | Trust income taxed at trust rate; R185 issued to beneficiary | Same — trust rate income tax; R185 for beneficiary |
| Practical use | Where parent wants capital to pass at 18 (or earlier at trustee discretion) | Where parent wants to delay capital until 21-25 for maturity reasons |
Exit Charge Rates by Age (Indicative)
| Age at vesting | Indicative exit charge rate | How calculated |
|---|---|---|
| 18 (immediately on qualifying age) | 0% (no charge if vesting at exactly 18 — treated as BMT threshold) | Capital passing at age 18 is treated as being within the BMT window — no charge. |
| 19 | Approximately 0.6% of trust value | Exit charge at 1/40th of the notional 30% rate × 1/10 of the 10-year rate × number of full quarters since age 18. |
| 21 | Approximately 1.8% | 3 years post-18 = approximately 3% effective rate at maximum (40% × 15% = 6% max, prorated). |
| 25 | Maximum approximately 4.2% | 7 years post-18 = maximum exit charge at 7 × (6%/10) = 4.2% of trust assets above NRB. |
Rates are indicative maximum rates assuming trust value above the NRB. Actual charge depends on the effective rate formula (ss71D, 64-66 IHTA 1984) and trust-specific factors.
Key Points on 18-to-25 Trusts
Qualifying conditions for an 18-to-25 trust
A trust qualifies as an 18-to-25 trust under s71D IHTA 1984 where: (1) the trust was established — either by a will or under the intestacy rules — on the death of a parent of the beneficiary; (2) the beneficiary is entitled to the trust property by the time they reach age 25 (the trust must specify that the beneficiary takes the capital by age 25 at the latest, with no power for trustees to defer beyond 25); (3) during the period from age 18 to 25, the beneficiary must be entitled to all income generated by the trust (they cannot be excluded from income during this period). The trust can give the trustees discretion over when within the 18-25 window to appoint capital — but the outside date must be 25.
The exit charge on vesting between 18 and 25
When the beneficiary takes their capital at any age between 18 and 25, an IHT exit charge applies. The charge is calculated using the relevant property regime exit charge formula, but at a reduced rate reflecting the short period the trust has been within the 18-25 regime. The effective rate is based on: (1) a notional '10-year' periodic charge rate applied to the trust; (2) divided by 40 (the number of quarters in 10 years); (3) multiplied by the number of complete quarters since the beneficiary turned 18. The maximum effective rate at age 25 (7 years × 4 quarters = 28 quarters ÷ 40 = 70% of the notional rate) is typically around 4.2% of the trust assets above the NRB. The earlier the capital is paid (closer to 18), the lower the exit charge — at age 18 itself, the charge is effectively nil.
When a parent should choose an 18-to-25 trust over a bereaved minors trust
The bereaved minors trust (s71A) has no exit charge when the beneficiary takes at 18 — it is more tax-efficient. The 18-to-25 trust incurs an exit charge (up to 4.2%) but allows the parent to specify that the child must wait until, say, 21 or 25 before receiving the capital — if the parent is concerned that an 18-year-old would be insufficiently mature to manage a significant inheritance. The trade-off: pay a modest exit charge (2-3%) vs. the child receiving a large sum at 18. For most modest estates, the exit charge is relatively small compared with the benefit of delaying capital to a more mature age. Where the trust is large or the parent is confident the child will be responsible at 18, the bereaved minors trust (no exit charge) is preferred.
Who can set up a s71D 18-to-25 trust?
A s71D trust can only be established by a parent of the beneficiary — either in their will or where the deceased dies intestate and the statutory trust arises under the Administration of Estates Act 1925. Grandparents, stepparents, or others cannot create a s71D trust for a bereaved young person. Where a grandparent wishes to leave assets to grandchildren on the death of the parent (i.e. on the grandparent's death rather than the parent's death), the s71D trust does not apply — the grandparent would need to use a bereaved minors trust (if their child predeceased them and the grandchild is under 18) or a standard relevant property trust.
Frequently Asked Questions
Can trustees appoint capital before age 18 from a s71D trust?
Yes — trustees of an 18-to-25 trust can appoint capital to the beneficiary before age 18 if the trust deed permits this. Early appointment of capital before age 18 triggers an exit charge under the relevant property regime (as the appointment is not within the 18-25 qualifying period). However, if the appointment is made at or after age 18 and before 25, the reduced s71D exit charge applies. The trust deed typically gives trustees discretion to appoint at any time — but the tax position differs depending on whether the appointment is before or after age 18.
Does the surviving parent's death affect a s71D trust?
A s71D trust is established on the death of one parent. The trust continues regardless of whether the other (surviving) parent subsequently dies. If the surviving parent also dies, the beneficiary's entitlement under the 18-to-25 trust is unaffected — the trust continues with its qualifying status until the beneficiary reaches 25 or takes their capital. The death of the surviving parent does not create a second s71D trust from the surviving parent's estate (unless the surviving parent also had a will that established a qualifying trust for the same child).
Can income be accumulated in an 18-to-25 trust before age 18?
During the period while the beneficiary is under 18, the trustees can typically accumulate income (subject to the perpetuity period and any specific trust deed provisions). Once the beneficiary reaches 18, they are entitled to all income from the trust — income can no longer be accumulated after age 18 (this is a qualifying condition for s71D status). Income paid to the beneficiary over 18 is taxed at their marginal income tax rate (with a tax credit for the trust rate tax already paid). The R185 certificate issued by the trustees records the income and the tax deducted.
What if the trust is set up by a step-parent?
Section 71D specifically requires the trust to be established on the death of a 'parent' of the beneficiary. 'Parent' for s71D purposes includes a natural parent and an adoptive parent, but does not include a step-parent (unless the step-parent has formally adopted the child). If a step-parent dies and leaves assets to the deceased's children by a previous relationship, a s71D qualifying trust cannot be established for them by the step-parent — only the natural parent's estate can fund a qualifying s71D trust. The step-parent's estate would need to use a standard relevant property trust, which would be subject to 10-year periodic charges and exit charges at full rates.
Is a s71D trust subject to the 10-year periodic charge?
No — a trust that qualifies under s71D IHTA 1984 is not subject to the 10-year periodic charge. The trust is specifically excluded from the relevant property regime during the period it qualifies (i.e. while the beneficiary is under 25 and the conditions are met). The only IHT charge is the exit charge when the beneficiary takes their capital at age 18-25. If the trust ceases to qualify (e.g. the trustees allow the capital to remain in trust beyond age 25, or the trust terms are varied so it no longer meets the s71D conditions), the trust falls into the relevant property regime and 10-year charges apply from that point.
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