The Relevant Property Regime Explained: IHT on Discretionary Trusts
The Relevant Property Regime is the three-part IHT system for discretionary trusts: an entry charge on transfer in (CLT at 20% above the NRB), a 10-year periodic charge (up to 6% every decade above the available NRB), and an exit charge when capital is distributed (a fraction of the anniversary rate). Understanding all three is essential for settlors, trustees, and beneficiaries.
The Three IHT Charges
1. Entry Charge (Chargeable Lifetime Transfer — CLT)
When it arises
When assets are transferred into the discretionary trust by the settlor
Rate
0% on the first £325,000 (nil-rate band) above zero (adjusted for CLTs in the previous 7 years). 20% on the excess above the NRB. If the settlor dies within 7 years, a further 20% is charged (bringing the total to 40% minus any taper relief for years 3–7).
Example
Settlor transfers £525,000 into a discretionary trust. Assuming no prior CLTs: £325,000 at 0% = nil. £200,000 at 20% = £40,000. Total entry charge: £40,000.
The NRB available for the trust is reduced by any CLTs (including transfers into other trusts) made by the settlor in the 7 years before this transfer. Where multiple trusts are created on the same day (related settlements), the NRB is shared between them.
2. 10-Year Periodic Charge (Anniversary Charge)
When it arises
On each 10-year anniversary of the date the trust was created
Rate
Maximum 6% of the trust fund above the available nil-rate band. In practice, the rate is based on the 'effective rate' — 30% of the lifetime rate of 20% — applied to the excess over the trust's available NRB. Maximum effective rate: 6% of the chargeable amount.
Example
Trust fund = £600,000 after 10 years. Available NRB = £325,000. Chargeable amount = £275,000. Periodic charge = £275,000 × 6% = £16,500.
The available NRB for the 10-year charge is reduced by: (a) the value of the trust fund when it first became relevant property (or at the last anniversary); (b) CLTs made by the settlor in the 7 years before the trust was created; (c) related settlements. Assets within the trust that qualify for BPR or APR are excluded from the chargeable amount.
3. Exit Charge (Between Anniversary Dates)
When it arises
When capital is paid out of the trust to beneficiaries between 10-year anniversaries
Rate
A fraction of the effective rate at the last anniversary (or the initial rate if no anniversary has yet occurred), proportional to the number of complete quarters since the last anniversary. Maximum fraction: 30/40 (if the distribution is in the last quarter before the anniversary).
Example
Effective anniversary rate: 6%. Distribution 6 years (24 quarters) after the last anniversary. Exit rate = 6% × (24/40) = 3.6%. Distribution of £100,000: exit charge = £3,600.
For trusts within the first 10 years (before any anniversary), the exit rate is based on the initial CLT entry rate at the time the trust was established — which itself depends on the settlor's NRB position at that date. Distributions in the first quarter after establishment have very low exit charges.
Frequently Asked Questions
What trusts are subject to the Relevant Property Regime?
The Relevant Property Regime (RPR) under Chapter III IHTA 1984 applies to most discretionary trusts and most trusts created after 22 March 2006 that do not fall into one of the excluded categories. Trusts within the RPR include: all discretionary trusts (where trustees have full discretion over distribution); interest in possession trusts created on or after 22 March 2006 (other than immediate post-death interests — IPDIs — and certain transitional serial interests); accumulation and maintenance trusts created after 22 March 2006 or not converted by 6 April 2008; most employee benefit trusts that are not qualifying EMI trusts. Trusts outside the RPR include: bare trusts (beneficiary absolutely entitled); IPDIs (immediate post-death interest trusts created by will); trusts for bereaved minors (s71A IHTA 1984 — no charges before 18); disabled persons trusts (s89 IHTA 1984 — favourable treatment); and age 18-to-25 trusts (s71D — limited exit charge only).
How is the 10-year periodic charge calculated in practice?
The 10-year periodic charge uses a multi-step calculation: (1) Determine the value of the trust fund at the anniversary date. (2) Subtract assets that qualify for BPR or APR — these are not relevant property and are excluded from the chargeable amount. (3) Determine the 'available nil-rate band' — the NRB (£325,000 in 2026/27) less: CLTs made by the settlor in the 7 years before the trust was created; the value of related settlements made on the same day. (4) Subtract the available NRB from the taxable fund value. If the result is zero or negative, no 10-year charge arises. (5) Apply the effective rate: the charge is calculated at the lifetime IHT rate (20%) of 30% = 6% maximum. In practice: chargeable amount × 6% = periodic charge. For a trust fund of £500,000 with a full NRB available of £325,000, the chargeable amount is £175,000 and the periodic charge is £175,000 × 6% = £10,500.
Can Business Property Relief reduce the 10-year charge on a trust?
Yes — assets within the trust that individually qualify for Business Property Relief (BPR) or Agricultural Property Relief (APR) are excluded from the chargeable value for the 10-year periodic charge and exit charges. The conditions: the assets must meet the BPR or APR qualifying conditions at the time of the charge (not just when they entered the trust); the trust must have owned the assets for at least 2 years (for BPR). If business property with BPR is placed into a discretionary trust, that property can grow in value tax-free within the trust because: (a) the initial entry charge is nil or reduced (BPR applies to the CLT); (b) at each 10-year anniversary, BPR assets are excluded from the periodic charge; (c) when distributed, BPR assets are excluded from the exit charge calculation. This makes a discretionary trust combined with BPR-qualifying assets an efficient long-term estate planning structure.
What is a 'related settlement' and why does it matter for the 10-year charge?
A 'related settlement' is any other trust established by the same settlor on the same day as the trust in question. Where a settlor creates two or more trusts on the same day, they are treated as related settlements, and the nil-rate band is shared between all of them. This prevents the NRB from being used multiple times by establishing several trusts on the same day, each claiming the full £325,000 NRB. For example, if a settlor creates three discretionary trusts on the same day with £200,000 each, the total fund across all three is £600,000. The shared NRB is £325,000. The chargeable amount across all three trusts is £275,000, and the 10-year charges are apportioned between the trusts pro-rata. Creating trusts on different days avoids the related settlement rule — each trust gets its own NRB — but each trust is a separate CLT so the 7-year rolling CLT clock still applies.
What is the maximum IHT rate under the Relevant Property Regime?
The maximum effective IHT rates under the RPR are: (1) Entry charge (CLT): 20% of the amount above the nil-rate band. If the settlor dies within 7 years, a further 20% (minus taper relief) is chargeable — giving a maximum of 40% on entry, the same as the death rate. (2) 10-year periodic charge: 6% of the trust fund above the available NRB. This is the theoretical maximum; actual rates are often lower if the trust is within the NRB or BPR/APR assets reduce the chargeable amount. (3) Exit charge: a fraction of the anniversary rate based on time elapsed — maximum 30/40 × 6% = 4.5%. In practice, well-planned trusts rarely incur the maximum charges. The key planning tools are: funding the trust at or below the NRB (zero entry charge); ensuring BPR/APR assets form part of the trust; distributing capital early in the first decade (low exit charge); and keeping multiple trusts under their respective NRBs.
Does the Relevant Property Regime apply to a trust established in a will?
It depends on the type of trust in the will. A discretionary will trust (where trustees have full discretion over who receives income and capital) is a relevant property trust from the date of death — the entry charge is treated as nil (because assets passing on death to a trust are not a CLT), but the 10-year anniversary charges and exit charges apply from the date of death. An immediate post-death interest (IPDI) trust — where the surviving spouse (or another person) has an immediate right to income — is NOT a relevant property trust. The trust assets are treated as in the beneficiary's estate under s49 IHTA 1984. A bereaved minor's trust (s71A) is also outside the relevant property regime. A flexible will trust (discretionary) is the most common structure that falls within the regime — trustees should be aware of the first 10-year anniversary and plan distributions accordingly.
Considering a Trust in Your Will?
Discretionary will trusts provide flexibility — but trigger the relevant property regime and its ongoing IHT charges. A WillSafe will kit helps you set up the right structure: whether a simple direct gift, an IPDI trust, or a discretionary arrangement.
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