Discretionary Trust Inheritance Tax UK: Entry Charge, Periodic Charge, and Exit Charge Explained (2026)
A discretionary trust is subject to three IHT charges: the entry charge (20% CLT above the NRB on lifetime gifts), the periodic charge (up to 6% every 10 years — s64 IHTA), and the exit charge on distributions (fraction of the periodic rate — s65 IHTA). For NRB will trusts, the periodic and exit charges are typically nil. Critical: placing the home in a discretionary trust loses the RNRB — up to £70,000 in avoidable IHT.
| IHT Charge | When Charged? | Rate | Form / Deadline |
|---|---|---|---|
| Entry charge (CLT) | On gift into trust during lifetime | 20% on amount above NRB (£325k) | IHT100 / 6 months from end of transfer month |
| Entry charge (will trust) | On death — via estate IHT | Part of overall estate IHT at 40% | IHT400 / 6 months from end of death month |
| Periodic charge (s64 IHTA) | Every 10th anniversary of trust creation | Up to 6% of trust fund; formula-based; often nil for NRB trusts | IHT100 + supplements / 6 months from 10-yr anniversary |
| Exit charge (s65 IHTA) | On capital distribution to beneficiary | Fraction of periodic rate × quarters elapsed / 40; often nil for NRB trusts | IHT100 / 6 months from distribution date |
| Death of settlor within 7yr of CLT | On death — CLT recalculated at 40% | 40% minus 20% credit = additional 20% max | IHT400 / additional tax on estate return |
2026/27. NRB: £325,000. Periodic charge: form IHT100 required; HMRC may enquire into calculation. Exit charge: report on IHT100 within 6 months of distribution. s144 IHTA: appoint assets out of will trust within 2yr of death — treated as passing directly from deceased (can claim RNRB).
Discretionary Trust IHT: Complete Guide
The relevant property regime — how discretionary trusts are taxed for IHT
A discretionary trust is a trust where the trustees have discretion over which beneficiaries benefit, in what proportions, and at what times. Since 22 March 2006 ('A-Day' for trusts), most trusts created during lifetime (other than bare trusts and disabled person's trusts under s89 IHTA) fall within the relevant property regime (s58 IHTA 1984). The relevant property regime applies three separate IHT charges that together replace the single IHT charge on death: the entry charge (when assets enter the trust), the periodic charge (every 10 years the trust has been in existence), and the exit charge (when assets or value leave the trust). These charges ensure that assets in discretionary trusts are not permanently sheltered from IHT — instead of paying 40% once on death, the trust pays smaller amounts periodically. For many well-managed NRB discretionary trusts, the charges are minimal or nil. For larger discretionary trusts above the NRB, the charges are real and must be managed.
The entry charge — setting up a discretionary trust during lifetime
A gift of assets into a discretionary trust during the settlor's lifetime is a Chargeable Lifetime Transfer (CLT). Unlike a PET (gift to an individual), a CLT is immediately chargeable to IHT at 20% on the amount above the available NRB. Example: a settlor with no prior CLTs or PETs in the last 7 years gifts £400,000 into a discretionary trust. The first £325,000 (NRB) is free. The excess £75,000 is charged at 20% = £15,000 lifetime IHT due. The CLT uses up the settlor's NRB. If the settlor dies within 7 years: the CLT is re-assessed at the full 40% death rate. The lifetime 20% charge is credited against the 40% — so the estate pays the difference. If the CLT used the full NRB and the settlor dies within 7 years with a large estate, the estate may have no NRB left and pay 40% on the full estate above zero. This is why structuring CLTs around the NRB is critical. The NRB accumulation rule: CLTs made in the 7 years before the new CLT are cumulated — reducing the available NRB for the new transfer.
The periodic charge (s64 IHTA 1984) — the 10-year anniversary charge
The periodic charge applies on each 10th anniversary of the date the trust was created. The maximum rate is 6% of the trust fund's value, but the actual rate depends on a formula. The formula: Actual rate = (notional effective rate × 30%) × trust fund value. The notional effective rate is calculated by treating the trust fund as a hypothetical transfer by the settlor at 20% lifetime IHT — using the NRB at the date of the 10-year anniversary and taking into account: (a) the initial value of the trust on creation (the 'entry value'); (b) cumulative CLTs made by the settlor in the 7 years before the trust was created; (c) the trust fund value at the 10-year anniversary. For an NRB discretionary trust in a will (typically £325,000 — the NRB amount): if the fund value at the 10-year anniversary is still below the NRB, the notional rate on the excess is 0% — so the periodic charge is often nil for NRB will trusts. For a larger lifetime discretionary trust (e.g., £600,000 into trust with the full NRB available): the excess £275,000 is taxed at 20% (notional) = effective rate of 9.17%; then 30% of that = actual rate 2.75%; periodic charge on £600,000 = £16,500. The trustees must complete form IHT100 (with supplementary pages) to report and pay the periodic charge. HMRC may enquire into the calculation.
The exit charge (s65 IHTA 1984) — IHT on distributions from the trust
An exit charge applies whenever capital (or property — as opposed to income) is distributed from the trust to a beneficiary. The exit charge is a proportional fraction of the 10-year periodic charge rate, based on the time elapsed since the last periodic charge (or since the trust was created, if no periodic charge has yet occurred). Exit charge formula: Exit charge = periodic charge rate × (quarters elapsed since last 10-yr charge / 40). Example: the trust's 10-year periodic charge rate was 3%. A distribution is made 6 years after the last periodic charge = 24 quarters / 40 = 60% × 3% = 1.8%. Exit charge on a distribution of £100,000 = £1,800. Key features: (1) If the trust was created on death (a will trust) and no periodic charge has yet occurred, the rate for the exit charge calculation is zero in many NRB trust cases — the exit charge may be nil if the trust value at creation was at or below the NRB; (2) The exit charge applies to capital distributions — income paid to beneficiaries is subject to income tax at the trust rates (45% for income other than dividends, 38.75% for dividends), not exit charge; (3) Loan repayments: where the trust made a loan to a beneficiary, the repayment of the loan is not a distribution for exit charge purposes. The trustees must complete form IHT100 for exit charges and pay any charge within 6 months of the distribution.
Discretionary trusts in wills — testamentary discretionary trusts
A discretionary trust created by a will (testamentary discretionary trust) has some important differences from a lifetime discretionary trust: (1) The entry charge: a will trust is not a CLT — there is no 20% entry charge on creation. The trust comes into existence on death; IHT on the estate (including the amount placed in the trust) is paid as part of the estate IHT; (2) The trust value on death: the IHT already paid on the death estate reduces the effective value entering the trust. The NRB discretionary trust in a will typically holds the NRB amount (£325,000); the IHT has been paid on the excess under the main estate IHT; (3) Periodic and exit charges: these apply in the same way as lifetime trusts — but for an NRB will trust with a fund below the NRB, the periodic charge is typically nil and the exit charge is often nil. The NRB at the 10-year anniversary is used; (4) Section 144 IHTA 1984: a discretionary trust created by will can be wound up within 2 years of death and the assets distributed as if they had passed directly from the deceased — overriding the normal IHT treatment. This is commonly used where the will was made before the RNRB (2017) and the trustee now wants to restructure the distribution to claim the RNRB.
The RNRB and discretionary trusts — the critical warning
The Residence Nil-Rate Band (RNRB — s8D IHTA 1984, up to £175,000 per person, frozen to 2030) requires the main home to pass to direct descendants to qualify. A discretionary trust is NOT a direct descendant. Where the family home is placed in a discretionary trust (including an NRB discretionary will trust): the RNRB is NOT available on that death — potentially losing up to £70,000 in IHT savings per death. This is the single most common and expensive IHT mistake in wills drafted before April 2017 (when the RNRB was introduced). Many solicitors and will writers placed the family home into NRB discretionary trusts as standard practice before 2017 — and those wills were never updated. A review of any will containing an NRB discretionary trust is essential: (a) If the home is in the trust: the will should be updated to direct the home to the surviving spouse outright (preserving the full unused RNRB for the second death), or to children directly (claiming the RNRB on the first death); (b) Alternatively, if death has already occurred: a s144 IHTA appointment within 2 years of death can redirect the home out of the trust to claim the RNRB.
Frequently Asked Questions
How is a discretionary trust taxed for inheritance tax?
A discretionary trust is subject to three IHT charges under the relevant property regime (s58 IHTA 1984): (1) Entry charge (CLT): 20% on the amount above the NRB when assets are gifted into the trust during the settlor's lifetime; (2) Periodic charge (s64 IHTA): up to 6% of the trust fund value on every 10th anniversary of the trust's creation; (3) Exit charge (s65 IHTA): a fraction of the 10-year rate on capital distributions from the trust, proportional to the time since the last periodic charge. Will trusts: the entry charge does not apply (no CLT on death). The periodic charge and exit charge still apply — but for NRB trusts (£325,000), these are typically nil or minimal.
How much is the 10-year periodic charge on a discretionary trust?
The maximum is 6% of the trust fund value, but the actual rate depends on a formula. The formula calculates a 'notional effective rate' based on: the trust fund value at the 10-year anniversary, the NRB at that date (£325,000 in 2026/27), and the cumulative CLTs by the settlor in the 7 years before creating the trust. The actual charge = notional effective rate × 30% × trust fund value. For an NRB will trust where the fund is £325,000 at the 10-year anniversary: the notional IHT on £325,000 is £0 (below NRB) — the periodic charge is nil. For a £600,000 lifetime trust where the full NRB was available at creation: a typical periodic charge is around 2-3% of the fund, payable every 10 years.
Does a discretionary trust in a will avoid inheritance tax?
Not entirely. A will trust avoids the 20% CLT entry charge (because the trust is created on death, not during lifetime). The assets in the trust are subject to IHT on the testator's death as part of the estate (the NRB discretionary trust typically holds the NRB amount on which the main estate IHT was nil). After creation: 10-year periodic charges (typically nil for NRB trusts below £325,000) and exit charges on distributions apply. The main benefit is removing the trust fund from the surviving spouse's estate — assets grow in trust outside the second estate, avoiding IHT on the second death. The RNRB is LOST if the home is in the discretionary trust.
What is the exit charge on a discretionary trust?
The exit charge (s65 IHTA 1984) applies when capital is distributed from a discretionary trust to a beneficiary. The charge rate = (last 10-year periodic charge rate) × (quarters elapsed since last 10-year charge / 40). Example: if the periodic charge rate was 3% and a distribution is made 5 years after the 10-year anniversary = 20 quarters / 40 = 50% × 3% = 1.5% exit charge. For NRB will trusts where the periodic charge was nil: the exit charge is typically nil. Trustees must report exit charges on form IHT100 within 6 months of the distribution.
Can a discretionary trust claim the RNRB?
No — a discretionary trust cannot claim the RNRB. The Residence Nil-Rate Band (s8D IHTA 1984) requires the main home to pass to direct descendants. A discretionary trust is not a direct descendant, even if the class of beneficiaries includes children. Placing the home in a discretionary trust loses the RNRB — up to £70,000 per death in avoidable IHT. To avoid this: direct the home to the surviving spouse outright (RNRB transfers to the second death — s8G IHTA), or direct the home to children directly; or use a s144 IHTA appointment within 2 years of death to redirect the home out of the trust.
Does Your Will Have an NRB Trust Containing the Home? Update It.
Pre-2017 wills routinely placed the home in an NRB discretionary trust. This loses the RNRB (up to £70,000 per death). Update the will to direct the home to the surviving spouse outright or directly to children. A WillSafe will kit makes updating straightforward.
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