Discretionary Trusts and Inheritance Tax UK 2026: Relevant Property Regime, 10-Year Periodic Charge, Exit Charge, NRB DT in Wills, and CLT Rules
A discretionary trust is the most flexible IHT planning tool in UK law — but it operates under its own tax regime with three separate IHT charges. Understand them and the NRB DT becomes powerful. Miss them and unexpected IHT bills arrive at 10-year anniversaries.
Three IHT Events — Relevant Property Regime (ss58-69 IHTA 1984)
Discretionary trusts face: (1) Entry charge at 20% above NRB (lifetime DTs only — not testamentary NRB DTs); (2) 10yr periodic charge max 6% above NRB; (3) Exit charge proportionate to time since last 10yr anniversary. An NRB DT in a will avoids all three if trust value stays ≤ NRB.
| Charge | When It Triggers | Rate | Example | Key Notes |
|---|---|---|---|---|
| Entry Charge (CLT) | Assets transferred INTO the DT during the settlor's LIFETIME (not on death) | 20% (half death rate) on the excess above the available NRB (£325k, reduced by CLTs by the same settlor in the prior 7yr). Trustees pay IHT: grossed-up rate = 20/80 = 25% on net. Settlor pays IHT: straight 20% on gross. | Settlor transfers £500k into a DT; no prior CLTs in 7yr. NRB = £325k. Chargeable: £500k − £325k = £175k × 20% = £35,000 IHT (if trustees pay). Grossed up if settlers pay the IHT from outside trust: £175k × 25% = £43,750. | No entry charge on death — testamentary DTs (NRB DT in a will) are NOT CLTs and attract no entry charge. CLT uses up NRB from the 7yr cumulation — reduces available NRB for subsequent CLTs in the same 7yr window. If settlor dies within 7yr of CLT: additional IHT may be due (taper applies — s7(4) IHTA). |
| 10-Year Periodic Charge (s64 IHTA) | Every 10th anniversary of the creation of the trust (the 'principal charge date'). Calculated on the value of the 'relevant property' held in the trust at the anniversary date. | Effective rate capped at 6% of the excess of trust value above the NRB (after deducting: the settlor's cumulative CLTs in the 7yr before trust creation; and the value of any 'related settlements' — trusts set up by the same settlor on the same day). Actual rate = 30% × hypothetical effective rate × (40 full 3-month quarters since creation ÷ 40). Maximum effective rate: 6% (30% × 20% = 6% for a trust running fully 10yr). | DT created with £700k; NRB at 10yr anniversary = £325k; no prior CLTs. Chargeable: £700k − £325k = £375k × 6% = £22,500 periodic charge. If trust value £300k (below NRB): £0 periodic charge. | Most testamentary NRB DTs (value ≤ NRB) pay £0 periodic charges. Related property: if settlor set up two DTs on the same day, their values are aggregated for NRB allocation — a trap. For trusts below the NRB: nil periodic charge throughout; exit charges calculated using a notional rate of 0% (effectively nil exits). |
| Exit Charge (s65 IHTA) | When assets are DISTRIBUTED from the DT to beneficiaries (or cease to be 'relevant property' — e.g., on appointment to an absolute interest). Applies each time property leaves the relevant property regime. | Exit rate = periodic charge rate (from the last 10yr anniversary) × (number of 3-month quarters since last 10yr anniversary ÷ 40). So: for a distribution 2yr (8 quarters) after the last 10yr anniversary: exit rate = periodic rate × 8/40 = 20% of the periodic rate. For distributions in the FIRST 10yr (before any 10yr anniversary): use a 'notional rate' — calculated as if the trust had run since creation to a hypothetical 10yr point. | DT with £700k; periodic charge = £22,500 (as above, so periodic rate = £22,500 ÷ £375k = 6%). Distribution of £200k made 2yr after the 10yr anniversary. Exit rate = 6% × (8 ÷ 40) = 6% × 20% = 1.2%. Exit charge = £200k × 1.2% = £2,400. | Exit charges reduce the benefit of DT distributions but are generally small (fraction of the 6% max). If the trust is below the NRB (periodic charge = nil): exit charges are nil throughout (because the exit rate is 0%). Many testamentary NRB DTs effectively pay no IHT throughout their existence — but must still file IHT100 returns at 10yr anniversaries and on chargeable exits. |
| s144 IHTA — Testamentary DT Appointments within 2yr of Death | Appointments (distributions) from a testamentary DT (DT created in a will) made within 2yr of the testator's death. | £0 exit charge — the appointment is 'read back' into the will and treated as if the testator had left the asset directly to the appointee. The usual exit charge rules are disapplied. The IHT treatment is based on who the appointee is: if to spouse → s18 IHTA spousal exemption applies; if to charity → charitable exemption; if to individuals → taxed as if a direct testamentary legacy. | Will creates NRB DT (£325k). Trustees appoint £325k to the surviving spouse 18 months after death. s144 IHTA treats this as if the testator left £325k directly to the spouse. s18 IHTA: spousal exemption applies — £0 IHT on the £325k. Without s144: the £325k would have been in the DT (outside the spouse's estate) with a small exit charge eventually; with s144 it is treated as if it went directly to the spouse at death. | s144 is extremely powerful for post-death planning. The DT gives trustees a 2yr window to decide who should benefit — the flexibility of a DT with the tax treatment of a direct bequest. Crucial for: deciding whether to claim the spousal exemption or keep assets in the DT for protection. Warning: s144 disapplied if the trustees have made any other appointment or advancement from the DT in the first 3 months after death (the 'excluded period' — so wait at least 3 months before s144 appointments). |
| Vulnerable Beneficiary Trust (s89 IHTA) | DT set up for a 'vulnerable beneficiary' as defined in s89B FA 2005: a disabled person (under DWP criteria) or a relevant minor. The trust must meet the conditions of s89 IHTA: income/capital applied for the vulnerable beneficiary's benefit; no power to apply for others during the vulnerable person's lifetime. | Exempt from the relevant property regime — no 10yr periodic charge; no exit charge during the vulnerable person's lifetime. For IHT: the trust property is treated as part of the vulnerable beneficiary's own estate (not the relevant property regime). | Parent sets up DT for disabled child (s89 IHTA qualifying). Assets: £500k. No 10yr periodic charge (relevant property regime disapplied). When child dies: £500k in child's estate for IHT purposes — but child's own NRB applies (£325k). IHT on £175k at 40% = £70k (if no other exemptions). Contrast with non-qualifying DT: £500k in DT → 10yr charge = £500k − £325k = £175k × 6% = £10.5k every 10yr. | Vulnerable beneficiary trusts are extremely tax-efficient if the beneficiary qualifies. Special income tax and CGT rates also apply (s23-s42 FA 2005). HMRC self-assessment: the trust files a VBT declaration. Review regularly — if the vulnerable beneficiary's circumstances change (e.g., recovery), the qualifying conditions may no longer be met. |
Discretionary trusts IHT UK 2026. Relevant property regime: ss58-69 IHTA 1984. Relevant property: trust property that is NOT: (i) property in which a qualifying interest in possession subsists (e.g., a life interest); (ii) excluded property; (iii) property subject to employee trust (s86); (iv) accumulation and maintenance trust property (most closed to new entrants since FA 2006). CLT: s3A IHTA — gifts to DTs are CLTs (not PETs); 20% rate (lifetime); grossed-up if trustees pay. Death within 7yr of CLT: additional IHT (death rate minus lifetime rate paid, with taper s7(4)). 10yr periodic charge: s64 IHTA; rate = 30% × effective rate × (quarters ÷ 40); max 6%; chargeable on 'relevant property' in the trust on the 10yr anniversary date; prior CLTs by same settlor in 7yr before trust creation reduce available NRB (s66(5)); related settlements (s62 IHTA): same settlor, same day — values aggregated for NRB. Exit charge: s65 IHTA; rate = periodic rate × (quarters since last 10yr ÷ 40); first 10yr uses notional rate (calculated as if 10yr periodic charge arose on hypothetical anniversary — s68 IHTA). IHT100 returns: required at 10yr anniversaries and on chargeable exits (IHTM42000 series). Trustee liability: s201 IHTA. s144 IHTA: appointments from testamentary DT within 2yr of death treated as if made by deceased directly; no exit charge; excluded period: first 3 months post-death (no appointments — Frankland v IRC [1997] EWCA Civ 2218). Vulnerable beneficiary trust: s89 IHTA; disabled person or relevant minor; FA 2005 ss23-42; exempt from relevant property regime; property treated as disabled person's own for IHT. Loan trusts: a separate structure — not a DT for relevant property purposes. Discounted gift trust: hybrid — part retained interest, part gift; only the 'discounted' gift element leaves the settlor's estate. NRB: £325k (frozen to April 2030). Related settlements trap: s62 IHTA — trusts created same day by same settlor; values aggregated for NRB allocation at each 10yr anniversary. s8A IHTA: tNRB does NOT increase the available NRB for trust periodic charges — tNRB only available to surviving spouses for their own estate, not to trusts. Finance Act 2006: major reform — most non-qualifying trusts now in relevant property regime. Pre-22 March 2006 trusts: transitional provisions still relevant for life interest trusts. IHT100d: 10yr anniversary. IHT100a: CLT. IHT100c: exit. Inheritance Tax Manual: IHTM42000.
Discretionary Trusts and IHT: The Complete Guide
Why the NRB Discretionary Trust is the cornerstone of will-based IHT planning
The NRB Discretionary Trust (NRB DT) is the most widely used IHT planning structure in UK estate planning — for good reason. It exploits three structural advantages simultaneously: (1) NO entry charge: because the NRB DT is created in a will (not during lifetime), there is no Chargeable Lifetime Transfer on creation. The legacy to the DT on death is simply a testamentary gift, which does not trigger the CLT entry charge. (2) NO periodic or exit charges (if below NRB): as long as the trust's value remains below the available NRB (£325k), the 10yr periodic charge is £0 (because the chargeable element — the excess above the NRB — is nil). Exit charges from a nil-rate trust are also nil. (3) FLEXIBILITY via s144 IHTA: trustees have a 2yr window to appoint the NRB DT assets to any beneficiary — and that appointment is treated as a direct testamentary gift from the deceased, not a distribution from a trust. This means: if the surviving spouse needs the money, the trustees can appoint to the spouse (s18 IHTA — IHT-free); if the children are better placed to receive, appoint to the children. The trustee decision is deferred for up to 2yr, allowing the family's circumstances to be assessed before committing. In practice: the surviving spouse is typically a DT beneficiary and can be 'lent' the DT assets (a trust loan) or receive income from DT investments — without the DT assets being in the surviving spouse's IHT estate. The DT assets sit outside the estate for the rest of the surviving spouse's life — and are distributed to the children on the surviving spouse's death, potentially free of IHT (if still within the NRB and the trust has not grown).
The 'related settlements' trap — how setting up multiple DTs on the same day can destroy the NRB allocation
A critical trap in discretionary trust IHT planning: 'related settlements' under s62 IHTA 1984. Two trusts are related settlements if they were created by the SAME SETTLOR on the SAME DAY. For the 10yr periodic charge calculation, the values of related settlements are aggregated when assessing how much NRB is available to each trust. Example: A settlor creates two DTs on the same day — Trust A with £200k, Trust B with £200k. Total: £400k. NRB: £325k. On the 10yr anniversary, each trust's periodic charge calculation must account for the combined value: Trust A sees its effective NRB allocation reduced because Trust B 'uses up' part of the same NRB. Specifically: each trust gets a proportionate share of the NRB — (Trust A value ÷ total value) × NRB. Trust A: (£200k ÷ £400k) × £325k = £162.5k NRB; excess = £200k − £162.5k = £37.5k × 6% = £2,250 periodic charge for Trust A. And the same for Trust B. Without the related settlements rule, each trust would have a full £325k NRB and both would be below it — £0 periodic charges each. The related settlements rule turns a zero-charge position into a chargeable one. Solution: do NOT create two DTs on the same day. If two trusts are needed, create them on different days (even one day apart).
Lifetime DTs versus testamentary DTs — when to use each
Lifetime Discretionary Trust (created during settlor's lifetime): the settlor transfers assets to the DT now (a CLT). Advantages: assets are removed from the settlor's estate immediately (if the settlor survives 7yr, the CLT is no longer in the 7yr cumulation); the trust can accumulate and invest outside the estate; future growth is outside the estate. Disadvantages: CLT entry charge at 20% on excess above NRB (if above NRB); the settlor has lost access to the assets (unless they are a discretionary beneficiary — but then the GWR rules may apply: s102 FA 1986); additional IHT on death if the settlor dies within 7yr (top-up from 20% to 40% with taper). Best for: transferring appreciating assets early (the 7yr clock starts immediately); BPR-qualifying assets (if the value is large and the BPR is at risk, a lifetime DT can shelter the asset). Testamentary Discretionary Trust (NRB DT in a will): no entry charge; no assets locked away during lifetime; flexibility to adjust who benefits within 2yr of death (s144 IHTA). Best for: NRB planning on first death; protecting assets from a beneficiary's bankruptcy or divorce; providing for multiple beneficiaries with different needs; vulnerable beneficiary planning.
Frequently Asked Questions
What is the 10-year inheritance tax charge on discretionary trusts?
The 10-year periodic charge (s64 IHTA 1984) applies to discretionary trusts every 10 years from the date of creation. Rate: maximum 6% of the excess of the trust's value above the available NRB (£325k) at the anniversary date, reduced proportionally for the number of complete 3-month quarters in the 10yr period (maximum 40 quarters). For most NRB Discretionary Trusts (value ≤ NRB): £0 periodic charge — no IHT at any 10yr anniversary. The calculation must account for: (a) prior CLTs by the settlor in the 7yr before the trust was created (these reduce the available NRB for the trust); (b) 'related settlements' (trusts created by the same settlor on the same day — their combined values share the NRB). HMRC form IHT100 must be filed at each 10yr anniversary even if no charge arises.
What is the exit charge on discretionary trusts?
The exit charge (s65 IHTA 1984) applies when assets are distributed from a discretionary trust to beneficiaries (or otherwise leave the relevant property regime). Rate: the exit rate = the 10yr periodic charge rate × (number of complete 3-month quarters since the last 10yr anniversary ÷ 40). For a distribution 2 years after the last 10yr anniversary: exit rate = periodic rate × 8/40 = 20% of the periodic rate. For distributions in the first 10yr (before any 10yr anniversary): a 'notional rate' is calculated as if the trust had a hypothetical 10yr anniversary. If the trust's value is below the NRB (so periodic charge = nil): exit charges are also nil. Exception: s144 IHTA — appointments from a testamentary DT within 2yr of death have no exit charge and are treated as direct testamentary gifts.
What is the NRB Discretionary Trust and how does it save inheritance tax?
An NRB Discretionary Trust (NRB DT) is a discretionary trust created in a will, funded with assets up to the Nil Rate Band (£325k). It saves IHT by: (1) keeping £325k outside the surviving spouse's estate — on the second spouse's death, these assets are not subject to IHT; (2) no entry charge — because it is testamentary (no CLT); (3) no 10yr periodic charge or exit charges if the trust value stays ≤ NRB; (4) s144 IHTA flexibility — trustees can appoint assets within 2yr of death, treated as a direct testamentary gift. IHT saving: £325k × 40% = £130,000 on the second death. With RNRB also available: the NRB DT + RNRB + tNRB + tRNRB allows married couples to shelter up to £1m from IHT.
What is s144 IHTA and how does it work for discretionary trusts?
Section 144 IHTA 1984 provides that appointments (distributions) from a testamentary discretionary trust made within 2 years of the testator's death are treated as if the deceased had left the asset directly to the appointee in the will. There is no exit charge. The IHT treatment depends on who receives the appointment: if to the surviving spouse → s18 IHTA spousal exemption (IHT-free); if to charity → charitable exemption; if to individuals → taxed as a direct testamentary legacy. This gives the trustees a 2yr decision window to assess the family's circumstances and then appoint assets in the most IHT-efficient way. Important restriction: s144 is not available if the trustees made any appointment from the DT in the first 3 months after death (the 'excluded period' — Frankland v IRC [1997]). Always wait at least 3 months before making any s144 appointment.
When do you pay inheritance tax when setting up a discretionary trust during your lifetime?
A lifetime transfer into a discretionary trust is a Chargeable Lifetime Transfer (CLT — s3A IHTA). IHT is payable at 20% (half the death rate of 40%) on the excess above the available NRB (£325k, reduced by CLTs in the prior 7yr). If trustees pay the IHT: grossed-up rate = 25% on the net amount. Example: £500k into DT; no prior CLTs. Chargeable: £500k − £325k = £175k × 20% = £35,000 IHT. If the settlor dies within 7yr of the CLT: additional IHT may be due at death (the difference between the 20% paid and 40% death rate, with taper relief applying after 3yr). If the CLT is within the NRB (£325k total): £0 IHT on creation, £0 periodic charges (if value stays ≤ NRB), and minimal exit charges.
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