Discretionary Trust IHT Charges UK: Periodic and Exit Charges Explained with Examples (2026)
A discretionary trust faces a 10-year periodic IHT charge (up to 6% of the trust value) and exit charges on every distribution. Understanding how these are calculated — and how to minimise them — is essential for anyone creating or administering a discretionary trust.
| Charge Type | When It Applies | Rate Calculation | Worked Example | Key Notes |
|---|---|---|---|---|
| Entry charge (CLT on creation) | When assets are settled into a discretionary trust by a lifetime transfer (CLT — chargeable lifetime transfer) | 20% at lifetime rate on the value above the available NRB (cumulated with CLTs in prior 7yr). If the CLT exceeds the NRB, IHT at 20% is due immediately. If the CLT is within the NRB: no immediate charge but the CLT reduces the NRB available for the periodic charge calculation at the 10yr anniversary. | Settlor transfers £500k into discretionary trust; no prior CLTs in 7yr. NRB £325k. CLT = £500k; chargeable above NRB = £175k; IHT at 20% = £35k. If the settlor pays the IHT: net into trust = £500k. If the trust pays the IHT: settlor pays the grossed-up equivalent. Settlor's chargeable transfer in 7yr before settlement = £500k — reduces NRB available for periodic charge at 10yr anniversary by £500k (but NRB is only £325k, so available NRB at 10yr = nil). | If the CLT is below the NRB: no immediate charge. The unused NRB at the date of settlement is NOT carried forward to reduce the periodic charge — only the settlor's prior 7yr transfers are relevant to the 10yr anniversary NRB calculation |
| Periodic charge (s64 IHTA — 10-year anniversary) | On each 10-year anniversary of the date the settlement was created (the 'commencement date'). First charge: 10th anniversary. Then 20th, 30th, etc. | Step 1: Calculate 'notional chargeable transfer' = current trust value of relevant property + value of relevant property distributed between 10yr anniversaries ('historicised' previous exits) + settlor's chargeable transfers in 7yr before commencement of settlement. Step 2: Calculate IHT at 20% lifetime rate on notional transfer above NRB. Step 3: 'Effective rate' = Step 2 IHT ÷ notional chargeable transfer. Step 4: Periodic charge rate = 30% × effective rate (max 6%). Step 5: Charge = periodic charge rate × trust value of relevant property at 10yr anniversary. | Trust created 2015; 10yr anniversary 2025; trust value = £600k. Settlor had £100k CLTs in 7yr before 2015. Notional transfer = £600k + £100k = £700k. IHT at 20% on £700k above NRB £325k = 20% × £375k = £75k. Effective rate = £75k / £700k = 10.71%. Periodic rate = 30% × 10.71% = 3.21%. Charge = £600k × 3.21% = £19,286. | If BPR or APR applies to trust assets: the chargeable relevant property value is reduced by BPR/APR before calculating the periodic charge. E.g., £400k qualifying AIM shares in trust (100% BPR — subject to £1m April 2026 cap): excluded from periodic charge; periodic charge only on remaining £200k. RNRB: not applicable to relevant property — no RNRB offset against periodic charge. |
| Exit charge (s65 IHTA — distribution between 10-year anniversaries) | When relevant property leaves the trust between 10-year anniversaries — e.g., a distribution of cash or assets to a beneficiary; a declaration that trust assets are held on bare trust for a beneficiary; a change in trust terms that takes assets out of the relevant property regime. | Exit charge rate = periodic charge rate at the preceding 10yr anniversary (or the initial rate if before the first 10yr anniversary) × N/40 where N = number of complete quarter-years between the last 10yr anniversary date (or settlement date if before first 10yr anniversary) and the date of the exit. Maximum exit rate = 6% × 40/40 = 6% (but 40/40 = just before the next 10yr anniversary). A distribution immediately after the 10yr anniversary: very low rate (small N); a distribution just before the next 10yr anniversary: higher rate. | Following the previous periodic charge example: periodic rate at 10yr anniversary = 3.21%. Distribution made 18 months (6 complete quarters) after the 10yr anniversary. N = 6. Exit rate = 3.21% × 6/40 = 3.21% × 0.15 = 0.48%. Distribution of £100k: exit charge = £100k × 0.48% = £482. Distribution of £400k: exit charge = £400k × 0.48% = £1,928. | Exit charge minimisation: trusts often distribute immediately after the 10yr anniversary (N = 1 or 2 = very low exit rate). Trustees can time distributions to minimise exit charges. BPR/APR also reduces the chargeable value on exit. CGT holdover relief (s260 TCGA 1992): available on a distribution that is an 'exit charge transfer' — the gain on the asset is held over to the recipient; the recipient's base cost is reduced by the held-over gain. CGT uplift on death of a QIIP life tenant does NOT apply to discretionary trusts (no qualifying interest in possession). |
| Initial charge on added property (s68 IHTA) | When new property is added to the trust between 10-year anniversaries (an 'addition'). The exit charge on property that was added between anniversaries and then later distributed uses a modified calculation based on the notional transfer at the date of the LAST 10-year anniversary (or the settlement date if before first 10yr anniversary), with the added property treated as a separate calculation. | For property added between the last 10yr anniversary and the exit: exit charge rate = rate calculated by reference to the notional transfer at the PREVIOUS 10yr anniversary date (using the trust value as at that anniversary + the addition) × N/40. The calculation can be complex for trusts with multiple additions — specialist software is recommended. | Trust at 10yr anniversary (2025): value £600k; periodic rate 3.21%. In 2026, settlor adds £100k to the trust. In 2027 (8 quarters after 10yr anniversary), the trustees distribute the £100k added property plus £100k existing property. For the existing property exit: rate = 3.21% × 8/40 = 0.64%; charge = £100k × 0.64% = £643. For the added property exit: calculated by reference to the modified notional transfer at the 2025 anniversary including the addition. Complex — take advice. | Avoid unnecessary additions to trusts: each addition has its own exit charge calculation and complicates the periodic charge at the next 10yr anniversary. If adding property to a trust is unavoidable, time it carefully and take specialist advice on the charge consequences. |
| Reliefs reducing periodic and exit charges | Business Property Relief (BPR — ss103-114 IHTA 1984) and Agricultural Property Relief (APR — ss115-124 IHTA 1984) reduce the chargeable value of relevant property in a discretionary trust for both periodic and exit charges | BPR: 100% for qualifying unquoted shares (including AIM — s105(1)(bb) IHTA); 100% for a business or interest in a business (s105(1)(a)); 50% for certain others. Subject to April 2026 £1m combined BPR/APR cap (Finance Act 2026). APR: 100% for owner-occupied agricultural land (s117(a)); 50% for tenanted land subject to AHA 1986 (s116(3)). BPR/APR conditions must be met at the periodic/exit charge date — the trust must have held qualifying property for the minimum period (2yr for BPR; 2yr s117(a) or 7yr s117(b) for APR). | Discretionary trust holds £500k AIM shares (BPR qualifying; held 3yr). Periodic charge: chargeable relevant property = £500k × (1 − 100% BPR) = £0. Periodic charge = £0. If the April 2026 £1m combined BPR/APR cap means only £750k of the trust's combined BPR/APR assets qualifies for 100%: £0 charge on first £1m; 50% on amounts over £1m (complex interaction — take specialist advice). | The April 2026 Finance Act 2026 £1m combined BPR/APR cap significantly affects trusts with qualifying business or agricultural property. Planning is required for trusts holding BPR/APR assets above the cap — the effective rate post-April 2026 for excess above £1m is 20% (100% BPR → 50% BPR for the excess → 50% × 20% × 30% effective rate at periodic anniversary). |
Discretionary trust IHT regime 2026: IHTA 1984. Relevant property: s58 IHTA. Entry charge (CLT on creation): s7 IHTA — lifetime rate 20% above NRB. Periodic charge: s64 IHTA — 10yr anniversary; rate = 30% × effective rate (max 6%); effective rate = (IHT at 20% on notional transfer above NRB) ÷ notional transfer; notional transfer = trust relevant property + settIor's prior 7yr CLTs + same-day additions + previous exits. Exit charge: s65 IHTA — rate = periodic rate × N/40 (N = complete quarters since last 10yr anniversary). Added property (s68 IHTA): modified calculation for property added between anniversaries. BPR (ss103-114 IHTA): 100% for qualifying unquoted shares (AIM — s105(1)(bb)); 100% business/interest (s105(1)(a)); subject to April 2026 £1m combined BPR/APR cap (Finance Act 2026). APR (ss115-124 IHTA): 100% s117(a); 50% s116(3). CGT holdover: s260 TCGA 1992 — on exit charge distributions; gain deferred; base cost reduced. s72 TCGA CGT uplift: does NOT apply to discretionary trusts (no QIP). RNRB: LOST in discretionary trust. IPDI (s49A IHTA): NOT relevant property; no periodic/exit charges; RNRB available (s8H IHTA); s72 TCGA CGT uplift on life tenant's death. Multiple trusts: prior 7yr CLTs by settlor reduce NRB available for periodic charge; related settlements (same day, same settlor, same trustees) share NRB.
Discretionary Trust IHT Charges: Complete Guide
Why discretionary trusts face ongoing IHT charges
A discretionary trust is a 'relevant property settlement' (s58 IHTA 1984). The term 'relevant property' means that the assets held in the trust are subject to the IHT 'relevant property regime' — a system of ongoing inheritance tax charges that applies throughout the trust's life. This regime was introduced by Finance Act 1982 and has been the standard IHT treatment for discretionary trusts (and most types of interest in possession trusts created after Finance Act 2006) since that date. The underlying rationale: without the relevant property regime, wealth could be 'locked up' in a discretionary trust indefinitely, passing between generations without ever entering an individual's estate and being taxed by IHT. The relevant property regime solves this by charging IHT periodically (every 10 years) and on exit from the trust, regardless of whether the assets have passed through any individual's estate. The two ongoing charges: (1) the periodic charge (s64 IHTA) — charged on the value of the trust at each 10-year anniversary at a rate that can approach (but not exceed) 6% of the trust value; and (2) the exit charge (s65 IHTA) — charged on distributions from the trust between 10-year anniversaries at a proportionate rate. Contrast with an IPDI trust (Immediate Post-Death Interest — s49A IHTA 1984): an IPDI is a qualifying interest in possession (QIP) and is NOT relevant property while it subsists — no periodic or exit charges apply. The life tenant's IHT estate includes the IPDI assets on their death, but there are no ongoing charges. This is one of the key IHT advantages of an IPDI trust over a discretionary trust for surviving spouse structures.
Calculating the periodic charge — step by step
The periodic charge (s64 IHTA) is calculated at each 10-year anniversary of the date the settlement was created. The calculation follows five steps: (1) Identify the chargeable relevant property: the market value of all relevant property in the trust at the 10-year anniversary. Assets with BPR (s103-114 IHTA) or APR (s115-124 IHTA) relief are reduced by the applicable relief percentage. (2) Calculate the 'notional chargeable transfer': add to the relevant property value: (a) the cumulative value of relevant property that left the trust since the last 10yr anniversary (previous exits, adjusted for BPR/APR); (b) the settlor's chargeable transfers made in the 7 years BEFORE the date the settlement was created (not in the 7 years before the anniversary — in the 7 years before the settlement was first created); (c) the value of any 'same-day' additions made by the same settlor on the date the settlement was created. This gives the 'notional chargeable transfer' figure. (3) Calculate IHT on the notional chargeable transfer: apply the lifetime rate of 20% to the amount above the NRB (£325k). First £325k: nil. Remainder: 20%. This gives a hypothetical IHT amount. (4) Calculate the effective rate: divide the hypothetical IHT amount by the notional chargeable transfer value. This gives a percentage that represents the 'effective rate'. The effective rate is always ≤ 20%. (5) Calculate the periodic charge: multiply the effective rate by 30%. The result is the periodic charge rate (max 6%). Multiply the periodic charge rate by the actual chargeable relevant property value at the 10yr anniversary to get the charge.
The exit charge and how trustees can time distributions to minimise it
The exit charge (s65 IHTA) applies whenever relevant property leaves the trust between 10-year anniversaries. Distributions to beneficiaries, appointments of trust assets out of the trust, and conversions from relevant property to non-relevant property all trigger an exit charge. The exit charge rate is: periodic charge rate × N/40 where N = the number of complete quarter-years elapsed since the last 10-year anniversary (or since the trust was created, if before the first 10-year anniversary). Key timing opportunity: immediately after a 10-year anniversary, N = 0 (no complete quarters have elapsed) — in theory the exit charge rate is zero. In practice, even after 1 complete quarter (3 months after the 10yr anniversary), N = 1 and exit rate = periodic rate × 1/40, which is very low. Trustees who are planning large distributions can time them to occur shortly after the 10-year anniversary to minimise the exit charge. Example: trust with a 3.21% periodic rate distributes £500k immediately after the 10yr anniversary (N = 1 quarter): exit rate = 3.21% × 1/40 = 0.08%; exit charge = £500k × 0.08% = £400. Same distribution 9 years after the 10yr anniversary (N = 36 quarters): exit rate = 3.21% × 36/40 = 2.89%; exit charge = £500k × 2.89% = £14,441. The difference in timing: £14,041 in exit charge. Practical note: trustees should keep a record of the last 10yr anniversary date, the periodic charge rate calculated at that anniversary, and the trust deed to ensure they can calculate exit charges correctly. CGT interaction: when trust assets are distributed to beneficiaries and an exit charge applies, s260 TCGA 1992 allows a 'holdover' of the CGT gain on the asset — the gain is deferred; the beneficiary's CGT base cost is reduced by the held-over gain. This means the beneficiary inherits the trust's latent CGT liability but pays no CGT at the time of the exit.
The settlor's prior transfers — why they reduce the NRB at the 10-year anniversary
One of the most counterintuitive features of the periodic charge calculation is the role of the SETTLOR'S chargeable transfers in the 7 years BEFORE the settlement was created (not 7yr before the 10yr anniversary). These prior transfers reduce the NRB available to offset the notional chargeable transfer at the periodic charge. Example: settlor made £200k of CLTs (gifts to other discretionary trusts) in 2014 and created a new trust with £400k in 2016. At the 10yr anniversary in 2026: notional chargeable transfer = £400k (trust value at 10yr anniversary). NRB available: £325k MINUS settlor's prior 7yr CLTs at the settlement date (2016): the settlor's 2014 CLTs were £200k and were within 7yr of the 2016 settlement date — so the available NRB is £325k − £200k = £125k. IHT at 20% on notional transfer above available NRB: 20% × (£400k − £125k) = 20% × £275k = £55k. Effective rate = £55k / £400k = 13.75%. Periodic rate = 30% × 13.75% = 4.125%. Charge = £400k × 4.125% = £16,500. Compare if no prior 7yr CLTs: notional = £400k; IHT at 20% on £75k (£400k − £325k NRB) = £15k; effective rate = 3.75%; periodic rate = 1.125%; charge = £4,500. The prior £200k CLTs in 2014 increased the periodic charge from £4,500 to £16,500 — a difference of £12,000. This illustrates why it is important to consider a settlor's 'transfer history' before creating a discretionary trust. If the settlor has used CLTs in the prior 7 years, the periodic charges will be higher.
Discretionary trusts vs IPDI trusts — the IHT charge comparison
The choice between a discretionary trust and an IPDI trust for a surviving spouse life interest structure has significant IHT consequences: (a) Discretionary trust: NO life tenant with a fixed right to income; trustees can distribute income and capital flexibly; RELEVANT PROPERTY — periodic charges every 10yr and exit charges on distributions; RNRB LOST (home in a discretionary trust does not qualify for RNRB); CGT holdover on exit (s260 TCGA — deferred gain, not washed out); (b) IPDI trust: life tenant has a legal right to income (or use of property); trust assets ARE in the life tenant's IHT estate (s49(1) IHTA — QIP); RNRB available if home passes to direct descendants on life tenant's death (s8H IHTA); CGT UPLIFT on life tenant's death (s72 TCGA — gains washed out); NOT relevant property — no periodic or exit charges while IPDI subsists. For many families, the choice is clear: an IPDI trust for the home gives CGT uplift, preserves the RNRB, and avoids periodic charges — at the cost of less flexibility (the life tenant must have a right to income; trustees cannot simply retain everything). A discretionary trust for the home gives more flexibility but loses the RNRB (potentially £70k cost per person) and incurs periodic charges. The £70k RNRB cost alone typically outweighs the flexibility benefit of the discretionary trust for most families where the home is the main asset. However: where the trust needs to hold the property flexibly for a class of potential beneficiaries (e.g., discretion to skip a beneficiary if they are in a high-tax position), a discretionary trust may be appropriate — with careful management of the periodic charge exposure through BPR-qualifying investments or regular exit distributions timed to minimise charges.
Frequently Asked Questions
What are the IHT charges on a discretionary trust?
A discretionary trust (relevant property — s58 IHTA 1984) is subject to two ongoing IHT charges: (1) Periodic charge (s64 IHTA — '10-year anniversary charge'): charged at each 10-year anniversary of the settlement's creation date. Rate: maximum 6% of the trust value (30% × the effective rate, where effective rate = IHT at 20% lifetime rate on the 'notional chargeable transfer' above the NRB ÷ notional chargeable transfer). The 'notional chargeable transfer' includes the trust value + the settlor's CLTs in the 7yr before the settlement was created. (2) Exit charge (s65 IHTA): charged on distributions from the trust between 10-year anniversaries. Rate = periodic charge rate × N/40 (N = complete quarter-years since the last 10yr anniversary). Maximum exit rate = 6% (if distributed just before the next 10yr anniversary). BPR (s103-114 IHTA) and APR (s115-124 IHTA) reduce the chargeable value for both charges. RNRB is LOST for assets in a discretionary trust.
How is the discretionary trust 10-year charge calculated?
The 10-year periodic charge (s64 IHTA) is calculated in five steps: (1) find the chargeable relevant property value in the trust at the 10yr anniversary (after BPR/APR); (2) build the 'notional chargeable transfer' = that value + exits since last 10yr anniversary + settlor's CLTs in 7yr before the trust was created; (3) calculate IHT at the lifetime rate of 20% on the notional transfer above the NRB (£325k); (4) divide that IHT by the notional transfer to get the effective rate (max 20%); (5) multiply effective rate by 30% to get the periodic charge rate (max 6%); then multiply the periodic charge rate by the actual trust value to get the charge. Example: trust value at 10yr = £500k; no prior settlor CLTs in 7yr; NRB £325k. IHT at 20% on £175k = £35k. Effective rate = £35k/£500k = 7%. Periodic rate = 7% × 30% = 2.1%. Charge = £500k × 2.1% = £10,500.
When do exit charges apply on a discretionary trust?
Exit charges (s65 IHTA 1984) apply whenever relevant property is distributed out of the trust between 10-year anniversaries — including distributions to beneficiaries, advancements, and changes in trust terms that remove assets from the relevant property regime. Exit charge rate = periodic charge rate (calculated at the last 10yr anniversary) × N/40, where N is the number of complete quarter-years elapsed since the last 10yr anniversary (or since the trust was created, if before the first 10yr anniversary). Trustees can reduce exit charges by timing distributions to occur shortly after the 10yr anniversary (low N = low exit charge) and by ensuring assets held in the trust qualify for BPR or APR (which reduces the chargeable value). CGT holdover relief (s260 TCGA 1992) is available on distributions that trigger an exit charge — the capital gain is deferred to the recipient.
Can BPR or APR reduce discretionary trust IHT charges?
Yes — Business Property Relief (BPR — ss103-114 IHTA) and Agricultural Property Relief (APR — ss115-124 IHTA) reduce the chargeable relevant property value for both the periodic charge and exit charges. If the trust holds qualifying BPR property (e.g., directly held AIM shares qualifying under s105(1)(bb) IHTA — 100% BPR) or qualifying agricultural land (100% APR under s117(a) or 50% under s116(3)): the BPR/APR relief reduces the chargeable trust value to nil (or 50%) for periodic and exit charge calculations. However: from April 2026 (Finance Act 2026), the combined BPR and APR for any individual or trust is capped at £1m at 100% — above this, the relief rate is 50%. For trusts holding BPR/APR assets above £1m: specialist planning is required as the effective periodic charge rate increases significantly above the cap.
What is the difference between a discretionary trust and an IPDI trust for IHT?
IPDI trust (s49A IHTA 1984): NOT relevant property while the IPDI subsists; no periodic charges (s64 IHTA) or exit charges (s65 IHTA); RNRB available if home passes to direct descendants on life tenant's death (s8H IHTA); CGT uplift on life tenant's death (s72 TCGA — gains washed out); life tenant's IHT estate includes the IPDI assets (s49(1) IHTA). Discretionary trust: RELEVANT PROPERTY; periodic charges every 10yr (max 6%); exit charges on distributions; RNRB LOST; CGT holdover on exit (s260 TCGA — deferred, not washed out); NO estate inclusion during trust's life (trustees hold assets for the benefit of a class — assets not in any individual's IHT estate). For surviving spouse will trusts where the home is the main asset: IPDI typically gives better IHT outcomes (RNRB + CGT uplift + no periodic charges vs RNRB lost + periodic charges). Discretionary trust is better where flexibility is paramount — but RNRB loss costs up to £70k per person.
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