Property in Trust and Inheritance Tax UK: How Different Trust Types Are Taxed (2026)
Property in a trust does not automatically avoid IHT — it changes who pays and when. An IPDI trust keeps property in the life tenant's estate (but preserves the RNRB); a discretionary trust removes it from beneficiaries' estates but loses the RNRB and triggers periodic charges; a bare trust treats the beneficiary as the outright owner.
| Trust Type | In Estate? | RNRB | Trust Charges |
|---|---|---|---|
| IPDI — Immediate Post-Death Interest | YES — in life tenant's IHT estate (s49(1) IHTA) | Preserved if remainder to direct descendants (s8H IHTA) | None — IHT only on life tenant's death |
| Discretionary trust (will trust) | NO — relevant property regime; not in any beneficiary's estate | LOST — even if only children are beneficiaries | Periodic charge s64 (up to 6% every 10yr); exit charge s65 |
| Bare trust for named beneficiary | YES — in beneficiary's estate as absolute owner | Preserved if beneficiary is a direct descendant | None — beneficiary treated as outright owner |
| s71D 18-25 trust | Hybrid — relevant property charges apply (reduced rate) until age 25 | RNRB applies where parent died and beneficiary is direct descendant | Exit charge on distributions between 18-25 (reduced rate formula) |
| Disabled person's trust | YES — in disabled beneficiary's estate (treated as IPDI) | Preserved if disabled beneficiary is a direct descendant | None (treated as owned by beneficiary) |
| Excluded property trust (non-dom settlor) | NO — excluded property; no IHT | N/A | No periodic or exit charges on excluded property |
| GWR — Gift with Reservation | YES — stays in donor's estate despite gift to trust | Based on value in donor's estate at death | Periodic/exit charges may also apply to the trust |
IPDI: s49A IHTA 1984; s49(1) IHTA — property in life tenant's estate. RNRB on IPDI: s8H IHTA 1984 — preserved if remainder to direct descendants (s8K IHTA). Discretionary trust: relevant property regime s58 IHTA 1984; periodic charge s64 IHTA (6% max every 10yr); exit charge s65 IHTA. RNRB LOST on discretionary trust — even if only children are beneficiaries. Bare trust: s49(1) IHTA — beneficiary treated as absolute owner. GWR: s102 FA1986 — property in donor's estate despite trust. POAT: FA2004 Sch 15 — annual income tax charge on benefit of previously owned property. 18-25 trust: s71D IHTA 1984. Disabled person's trust: s89 IHTA 1984. Excluded property: s48 IHTA 1984. Double charge relief: SI 1987/1130.
Property in Trust and IHT: Complete Guide
IPDI trusts — property in the life tenant's IHT estate
An Immediate Post-Death Interest (IPDI — s49A IHTA 1984) is a trust created by will or intestacy where a person becomes entitled to the income from trust property immediately on the deceased's death. Common example: a couple where the first to die leaves everything to the survivor as life tenant (with remainder to the children). Under s49(1) IHTA 1984, the trust property is treated as belonging to the life tenant for IHT purposes — it is in the life tenant's IHT estate on their death, taxed as if they owned it outright. The key tax consequences of an IPDI: (1) No periodic or exit charges — the relevant property regime (discretionary trust charges) does not apply; (2) IHT on the life tenant's death at 40% above the NRBs; (3) RNRB (s8D IHTA 1984) is preserved where the IPDI terminates on the life tenant's death and the property passes to direct descendants as remaindermen (s8H IHTA 1984). In practice: a married couple using a life interest will trust (IPDI) for the family home can preserve both the spousal exemption on first death AND the RNRB on the survivor's death — unlike a discretionary trust (where RNRB is lost). A pre-2006 interest in possession trust (created before 22 March 2006) is also treated under s49(1) IHTA as if the beneficiary owned the trust property — an IPDI for IHT purposes regardless of whether it technically meets the s49A definition.
Discretionary trusts — the relevant property regime and trust IHT charges
A discretionary trust (also called a relevant property trust — s58 IHTA 1984) means no individual beneficiary has a fixed entitlement to the trust assets. The trustees have discretion over who benefits, when, and how much. Under the relevant property regime, trust property is NOT in any beneficiary's IHT estate. Instead, three trust-level IHT charges apply: (1) Entry charge: when assets are put into a discretionary trust during lifetime (a CLT — Chargeable Lifetime Transfer — s2 IHTA 1984), IHT at 20% on the amount above the settlor's available NRB (£325,000). Gifts into trust in a will (a will trust) do not attract an entry charge — the property passes into the trust on death subject to the normal estate IHT. (2) Periodic charge (s64 IHTA 1984): every 10 years from the date the trust was set up, a periodic charge is calculated. The maximum rate is 6% of the trust value above the available NRB. The actual rate is calculated via a formula: the 'notional effective rate' (the rate that would apply if the trust fund had been a CLT at creation, taking into account cumulation) × 30% × the net trust value at the 10th anniversary. For many NRB discretionary trusts (below £325,000 in value), the periodic charge is nil. (3) Exit charge (s65 IHTA 1984): when capital is distributed from the trust, an exit charge applies — a fraction of the relevant periodic charge rate × the number of quarters elapsed since the trust was set up or the last periodic charge. Key trap: if the family home is left to a discretionary trust in the will, the RNRB (£175,000) is LOST — even if the only beneficiaries are the children. RNRB cannot be claimed where property passes into a discretionary trust.
Bare trusts — the simplest trust for IHT
A bare trust (also called a 'simple trust' or 'absolute trust') is one where the beneficiary has an immediate, absolute, and unconditional right to both the income and capital of the trust. For all tax purposes (IHT, CGT, income tax), HMRC treats the beneficiary as if they own the trust property outright. IHT treatment: the trust assets are in the beneficiary's IHT estate as if they owned them outright. No periodic or exit charges apply — only the beneficiary's normal IHT rules apply on their death. RNRB: if the beneficiary is a direct descendant (child, grandchild, stepchild, etc.) and the trust property includes a qualifying residential interest, the RNRB is available — the trust is treated as a direct gift to the beneficiary. Bare trusts for children: commonly used for grandparent-to-grandchild gifts. The gift into a bare trust for an individual beneficiary is a PET (s3A IHTA 1984) — 7-year clock; IHT-exempt on survival. The child is the absolute beneficiary — no periodic/exit charges; income taxed at the child's rates (parental settlement rules may apply if parents are the settlors — income taxable on parents until child turns 18 if a parental gift). Named beneficiary bare trusts for the family home: can preserve the RNRB — provided the named beneficiary is a direct descendant, the RNRB applies to the net value of the home passed through the bare trust.
Gift with Reservation — when trust property stays in the donor's estate
A Gift with Reservation (GWR — s102 Finance Act 1986) occurs where property is gifted (including into a trust) but the donor retains a benefit from the property. The most common scenario: the donor puts assets into a trust but continues to benefit from them (e.g. they put the family home into a discretionary trust but continue to live there rent-free). The GWR rule means: the trust property is treated as still belonging to the donor for IHT purposes — it is in the donor's estate at death at its date-of-death value. Double charge risk: where property is subject to the GWR rule AND is in a discretionary trust (relevant property regime), both the GWR estate charge AND the trust periodic/exit charges could potentially apply. HMRC's Inheritance Tax (Double Charges Relief) Regulations 1987 (SI 1987/1130) provide relief to avoid double counting — only the larger of the two charges applies. POAT (Pre-Owned Asset Tax — Finance Act 2004, Schedule 15): even where property is NOT caught by the GWR rule (e.g. the donor does not benefit from the trust), HMRC can impose an annual income tax charge (POAT) on the benefit of the enjoyment of property previously owned by the donor. Escaping GWR for family home: the home must be given away with the donor ceasing to occupy it; or the donor pays a full market rent to the trust (which ceases the reservation — but the rental income is taxable on the trustees); or consider an equity release or tenants-in-common + IPDI structure instead.
RNRB and trusts — the critical planning point
The Residence Nil-Rate Band (RNRB — s8D IHTA 1984) is one of the most valuable IHT allowances available — worth £175,000 per person (£350,000 for a couple using the transferred RNRB), or up to £140,000 in IHT savings. Whether property in a trust can qualify for the RNRB depends entirely on the trust type: (1) Discretionary trust: RNRB is ALWAYS LOST — no matter who the beneficiaries are. Even if the will says 'I give my home to my trustees to hold on discretionary trusts for my children', the RNRB is lost because the home does not pass to a specific direct descendant. (2) IPDI trust: RNRB IS preserved on the life tenant's death, provided the remainder passes to direct descendants (s8H IHTA 1984). Common structure: home in IPDI trust for surviving spouse; on the survivor's death, remainder passes to children; RNRB applies to the home value up to £175,000. (3) Bare trust: RNRB IS preserved — the named beneficiary is treated as the absolute owner; RNRB applies if the beneficiary is a direct descendant. (4) 18-25 trust (s71D IHTA): RNRB can apply — available where the parent died and the child beneficiary is a direct descendant; the home passes to the child on reaching the trust age (up to 25). Action point: ALL wills that were drafted before April 2017 (when the RNRB was introduced) should be reviewed — particularly where the home was left to a discretionary trust or NRB discretionary trust. Pre-2017 will trust structures frequently lose the RNRB inadvertently.
Frequently Asked Questions
Does property held in trust avoid inheritance tax?
It depends on the trust type. Discretionary trust (relevant property regime — s58 IHTA 1984): trust property is NOT in any beneficiary's IHT estate on their death — IHT is replaced by periodic charges (up to 6% every 10 years — s64 IHTA) and exit charges (s65 IHTA) on distributions. IPDI trust (s49A IHTA): property IS in the life tenant's IHT estate — taxed on the life tenant's death. Bare trust: property is in the beneficiary's IHT estate — no periodic/exit charges. Property in a trust does not automatically avoid IHT — it changes who pays IHT and when, not whether IHT applies.
Does putting a house in trust save inheritance tax?
Rarely — and it almost always loses the RNRB if a discretionary trust is used. Placing the family home in a discretionary trust: (1) loses the RNRB (worth up to £70,000 per person in IHT savings); (2) creates periodic charges (up to 6% every 10yr) and exit charges; (3) if the donor continues to live in the house, triggers the Gift with Reservation rule (s102 FA 1986) — the home stays in the IHT estate anyway. Better alternatives: leave the home directly to children (or through an IPDI or bare trust) — preserves the RNRB; or lifetime gifting with the donor vacating the property (PET — 7yr clock; no GWR if donor stops benefiting).
Does an IPDI trust preserve the RNRB?
Yes — an IPDI (Immediate Post-Death Interest) trust preserves the RNRB (s8H IHTA 1984). When the IPDI ends on the life tenant's death (e.g. surviving spouse), the RNRB applies if the property passes to direct descendants (children, grandchildren, stepchildren, etc.) as remaindermen. This is the most common planning structure for married couples: home in IPDI trust for the survivor; on the survivor's death, passes to children — preserving both the RNRB (£175,000) and the transferred RNRB (£175,000), up to the full £350,000 of combined RNRB. A discretionary trust does NOT preserve the RNRB.
What are the IHT charges on a discretionary trust?
A discretionary trust (relevant property trust — s58 IHTA 1984) is subject to three IHT charges: (1) Entry charge: IHT at 20% on lifetime gifts (CLTs) into the trust above the NRB (£325,000); no entry charge on a will trust (property enters the trust on death). (2) Periodic charge (s64 IHTA): every 10 years — up to 6% of the trust fund above the NRB. The actual rate is the 'notional effective rate' × 30% × the trust value. Many NRB trusts (below £325,000 in value) have a nil periodic charge. (3) Exit charge (s65 IHTA): when capital is distributed from the trust — a fraction of the periodic rate × quarters elapsed since the last 10-year charge. Exit charges are typically small (a fraction of the already-low periodic charge).
What is a Gift with Reservation and when does it apply to a trust?
A Gift with Reservation (GWR — s102 Finance Act 1986) occurs when property is put into a trust but the donor retains a benefit — typically the donor continues to live in the home placed in trust, or benefits from assets gifted to the trust. The GWR rule treats the trust property as still belonging to the donor for IHT purposes — it stays in the donor's estate at death at its then-current value. Common trap: putting the family home into a trust (including a discretionary trust) while the donor continues to live there rent-free. Solution: the donor must give up all benefit from the asset; or pay a full market rent to the trust (which ends the reservation — but creates taxable rental income for the trust). POAT (FA 2004, Sch 15) may still apply to property previously owned where the GWR rule is side-stepped.
Your Will Must Specify the Right Trust Type
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