Settled Property and IHT UK 2026: s43 IHTA Definition, The Relevant Property Regime, 10-Year Periodic Charges, Exit Charges, Excluded Property Trusts, and FA 2006
Settled property is property held in trust. Most discretionary trusts are subject to the relevant property regime — a 10-year periodic charge (max 6%) and exit charges on distributions. Keep the trust below £325k and the charges are nil.
One Trust Below the NRB = Nil 10-Year Charges and Nil Exit Charges — Indefinitely
If the trust fund (including any related settlements and same-day additions) stays below the available NRB (£325k less any prior CLTs by the settlor in the 7yr before the trust was created) at each 10-yr anniversary: the 10-yr charge is nil and exit charges are nil. A single well-funded discretionary trust below the NRB is an IHT-free vehicle for discretionary family wealth management.
| Aspect | Detail | Example / Application | Planning Guidance |
|---|---|---|---|
| What is settled property — s43 IHTA 1984 | s43 IHTA 1984 DEFINITION: property is 'settled property' if it is held on trust and is not immediately and absolutely owned by a single individual. Specifically: (a) property held in trust for persons IN SUCCESSION (e.g., 'to A for life, remainder to B' — A has a life interest; B has a remainder interest; neither has immediate absolute ownership of the whole); (b) property held for a person SUBJECT TO A CONTINGENCY (e.g., 'to A if A reaches age 25'; A does not have immediate absolute entitlement while they are under 25 — the property is settled until the contingency is met or fails); (c) property held in a DISCRETIONARY TRUST (no beneficiary has any immediate entitlement — the trustees have discretion over distributions; no one is absolutely entitled immediately). THE SETTLEMENT: the settlement is the arrangement under which the property is held as settled property. A settlement = a trust. The SETTLOR: the person who creates the settlement by transferring property into the trust. The TRUSTEES: the persons who hold the settled property. The BENEFICIARIES: those for whom the settled property is held. s44 IHTA 1984: a person is the settlor if they have provided the property for the purposes of the settlement — directly, or indirectly, or by making a reciprocal arrangement. | EXAMPLES OF SETTLED PROPERTY: (1) A discretionary trust created by a will (e.g., 'I leave my estate to my trustees to hold on discretionary trust for my children and grandchildren'): the property in the trust = settled property from the date the estate is administered and the trust constituted. (2) A lifetime discretionary trust (e.g., a grandparent transfers £300k to trustees to hold for grandchildren): settled property from the date of transfer. (3) An interest in possession trust created by a will (e.g., 'I give my residue to my trustees to pay the income to my wife for life, remainder to my children'): the residue = settled property; the wife has an IPDI (s49A IHTA — treated as if she owns the assets for IHT; NOT relevant property). (4) An accumulation trust for a minor (pre-FA 2006 — now must meet the bereaved minor trust conditions of s71A IHTA to be excepted from relevant property). (5) A pilot trust created with £10 during the settlor's lifetime: the £10 = settled property in the pilot trust. | WHEN IS PROPERTY NOT SETTLED PROPERTY: (1) A bare trust: property held by a trustee for a single adult beneficiary who has an immediate and absolute entitlement. A bare trust nominee (e.g., a stockbroker holding shares as nominee for the beneficial owner) is a bare trust — the beneficial owner is immediately and absolutely entitled; this is NOT settled property for IHT. (2) Property held for a single absolutely entitled adult: no contingency; no successive interests; no discretion. (3) A resulting trust arising purely from an absence of beneficial interest (not a succession of interests). IHT POSITION OF SETTLED PROPERTY: settled property in a relevant property trust is NOT in the settlor's estate for IHT (the settlor has transferred it into trust). The trust itself is subject to the relevant property regime (s64 periodic charges; s65 exit charges). Exception: property in an IPDI trust or a s89 disabled trust is treated as part of the life tenant's/disabled person's estate under ss49-89 IHTA. Property in a bereaved minor trust (s71A) is not in the estate of anyone — it is subject to specific IHT treatment. |
| The relevant property regime — ss58-65 IHTA 1984 | RELEVANT PROPERTY — s58 IHTA 1984: 'relevant property' means settled property in which no qualifying interest in possession subsists (i.e., settled property in a discretionary trust or similar arrangement where no beneficiary has an immediate fixed entitlement to income). WHAT IS NOT RELEVANT PROPERTY (s58(1) IHTA — exceptions): (1) Property in which a qualifying interest in possession subsists: an IIP held by an individual (but from 22 March 2006: ONLY if the IIP is a pre-FA 2006 IIP that existed before that date; or an IPDI (s49A); or a disabled person's interest (s89B); or a transitional serial interest (ss49B-49D)). NEW IIP trusts created after 22 March 2006: the life tenant's interest is NOT a qualifying IIP for relevant property purposes — the trust IS relevant property. (2) Property held for charitable purposes only (and not for non-charitable purposes): charitable trusts — exempt. (3) Property in a bereaved minor trust (s71A IHTA — trust under a will or intestacy for children under 18 where they become entitled at 18). (4) Property in a disabled person's trust (s89 IHTA). (5) Excluded property: property that is excluded from IHT altogether (e.g., property held outside the UK by a non-LTUK settlor — ss48(3)-(3A) IHTA). SCOPE OF THE RELEVANT PROPERTY REGIME: most discretionary trusts are subject to the relevant property regime. Most trusts created after 22 March 2006 with an income beneficiary (IIP) are also relevant property (since FA 2006 changed the IIP rules). | THE 10-YEAR PERIODIC CHARGE — s64 IHTA 1984: a charge on the relevant property in a settlement at each 10-year anniversary. The anniversary date = 10yr from when the settlement 'commenced'. For most settlements: the commencement date = when the settlement was created (when the settlor first transferred property into trust). For a will trust: commencement = the date of the testator's death (when the trust takes effect). For a pilot trust: commencement = the date the pilot trust deed was executed (the date of the nominal £10 transfer). KEY: the 10-yr anniversary date does NOT change if further property is added to the trust after the trust was created. Large assets added to an existing trust years after creation: their 10-yr charge anniversary date is still based on the original trust creation date. CALCULATION OF THE 10-YR CHARGE: step 1 — find the value of all relevant property in the settlement at the 10-yr anniversary date. Step 2 — add: (a) the value of property in related settlements at the date of commencement; (b) the value of distributions from the trust since the last 10-yr anniversary; (c) same-day additions (FA 2014 — see above). Step 3 — the settlor's prior CLTs in the 7yr before the settlement was created are added (they eat into the NRB). Step 4 — apply the NRB (£325k less prior CLTs) to the combined figure. Step 5 — calculate hypothetical IHT at 20% on the excess. Step 6 — effective rate = hypothetical IHT / (relevant property + related settlements + same-day additions). Step 7 — actual 10-yr rate = 30% × effective rate. Step 8 — 10-yr charge = actual rate × relevant property value. FILE IHT100: HMRC Form IHT100 must be filed at each 10-yr anniversary (even if the charge is nil — the filing starts the HMRC enquiry clock). | PLANNING WITH THE RELEVANT PROPERTY REGIME: (1) KEEP THE TRUST FUND BELOW THE NRB: if the trust fund (including related settlements and same-day additions) is below the NRB (£325k — less any prior CLTs by the settlor in the 7yr before the trust was created): the 10-yr charge is nil; the exit charge is nil. This is the main planning point for small discretionary trusts. (2) MULTIPLE TRUSTEES, SINGLE TRUST: using one trust instead of multiple trusts is now the norm post-FA 2014 (same-day addition rules prevent NRB multiplication across multiple trusts via same-day will additions). (3) DISTRIBUTE BEFORE THE 10-YR ANNIVERSARY IF THE CHARGE WILL BE MATERIAL: if the trust fund has grown significantly and the 10-yr charge will be material (above the NRB): consider distributing assets in the years before the anniversary to reduce the fund value at the anniversary date. Exit charges apply to distributions (but are lower than the 10-yr charge if distributed early in the 10-yr period). (4) INVEST FOR GROWTH: assets within a trust grow free of IHT (only the value at each 10-yr anniversary is charged; growth between anniversaries is only charged at the NEXT 10-yr anniversary). Trusts can be effective long-term wealth preservation vehicles. (5) BPR ASSETS IN TRUST: if the trust holds qualifying business property (AIM shares in qualifying companies; unlisted trading company shares): BPR may reduce the value of relevant property for the 10-yr charge calculation (BPR at 100% on the qualifying amount up to the FA 2026 £1m combined cap). |
| Excluded property trusts — offshore settlements and IHT | EXCLUDED PROPERTY IN A SETTLEMENT — s48(3) IHTA 1984: property in a settlement is excluded property (outside UK IHT) if: (a) the property consists of property situated OUTSIDE the UK; AND (b) the settlor was not LTUK (and not UK-domiciled) when the settlement was made. SETTLOR'S STATUS WHEN THE SETTLEMENT WAS MADE: this is the KEY rule for excluded property trusts. The determination of excluded property status is fixed at the TIME THE SETTLEMENT WAS CREATED. If the settlor was non-LTUK/non-dom when they created the trust: the non-UK assets in the trust = excluded property for IHT — REGARDLESS of what happens later (even if the settlor subsequently becomes LTUK or UK-domiciled; even if the beneficiaries are LTUK). This is the 'excluded property trust' or 'offshore trust' planning structure. WINDOW FOR CREATION: a non-LTUK individual who plans to become UK resident should create the offshore trust BEFORE reaching the 10-year UK residence threshold for LTUK status. Once LTUK: any settlement created is NOT eligible for excluded property status (the settlor was LTUK when the settlement was made). | HOW EXCLUDED PROPERTY TRUSTS WORK IN PRACTICE: (1) STRUCTURE: a non-LTUK individual (e.g., a foreign national who plans to move to the UK) creates a discretionary trust in an offshore jurisdiction (Jersey; Isle of Man; Cayman Islands; Singapore; Cyprus). The trust holds overseas investments (non-UK funds; overseas property; offshore bonds). (2) IHT TREATMENT: the overseas assets in the trust = excluded property (non-UK situs; settlor was non-LTUK at settlement). No UK IHT: no 10-yr periodic charge; no exit charges; the assets are outside UK IHT entirely. (3) THE SETTLOR BECOMES LTUK: the settlor subsequently becomes UK resident for 10 of the last 20 years. Their personal estate: now subject to worldwide UK IHT (LTUK status). Their EXCLUDED PROPERTY TRUST: STILL excluded property (the settlor was non-LTUK when the trust was made; s48(3) IHTA is determined at the time of settlement). The trust assets are still outside UK IHT. (4) ANNUAL EXEMPTION / ADDITIONS: any ADDITIONAL ASSETS transferred into the trust after the settlor becomes LTUK: those additions are NOT excluded property (the settlor is LTUK at the time of the addition). The existing excluded property remains excluded; only new additions are within the relevant property regime. | FINANCE ACT 2017 — RESTRICTIONS ON EXCLUDED PROPERTY TRUSTS: Finance Act 2017 limited the excluded property status of certain assets: (1) UK RESIDENTIAL PROPERTY (s48(3A) IHTA — see the non-dom article): from 6 April 2017, property in a settlement that derives its value from a UK dwelling is NOT excluded property — regardless of whether the settlor was non-LTUK at the time of settlement. Offshore trusts holding UK residential property are within UK IHT from 2017. (2) FINANCE ACT 2025 — LTUK TEST REPLACES DOMICILE: from 6 April 2025, the test for excluded property trust purposes uses the LTUK test (10 of the last 20 tax years UK resident) rather than UK domicile. The settlor's domicile at the time of settlement is no longer determinative — the settlor's LTUK status at the time of settlement is what matters. The 'tail provision': once LTUK, the settlor remains within UK IHT for 10 years after leaving the UK (a tail provision). PLANNING FOR EXCLUDED PROPERTY TRUSTS IN 2026: (a) Create the trust BEFORE reaching 10yr UK residence. (b) Fund with non-UK assets (excluded property). (c) Do NOT add UK residential property to the trust (FA 2017 — not excluded). (d) Do NOT add further assets after becoming LTUK (those additions are relevant property). (e) Seek specialist tax and trust advice (Jersey, Guernsey, Isle of Man, or Singapore legal teams coordinated with a UK IHT specialist). The excluded property trust window is precious and short — once missed (once LTUK), the opportunity to create an excluded property trust is gone. |
| Exit charges — s65 IHTA 1984 | EXIT CHARGES — s65 IHTA 1984: a charge arises when relevant property leaves a settlement (an exit charge). Triggers: (a) distribution of relevant property to a beneficiary (trustees exercise their discretion to pay out trust assets to a beneficiary); (b) capital advancement to a beneficiary (capital payment; appointment of assets); (c) a change in status of settled property from relevant property to non-relevant property (e.g., the property becomes an excluded property or an IPDI arises on it). When does the exit charge arise: the exit charge is calculated based on the number of COMPLETE QUARTERS elapsed since the last 10-year anniversary. RATE OF EXIT CHARGE: (1) Where the exit occurs BEFORE the first 10-yr anniversary: the rate is based on the effective rate that would have applied at the notional 10-yr anniversary calculation (using the values at the date of exit). The actual exit charge rate = hypothetical 10-yr effective rate × (number of complete quarters since settlement started / 40). (2) Where the exit occurs AFTER the first 10-yr anniversary: the rate is based on the ACTUAL 10-yr effective rate charged at the last 10-yr anniversary. The actual exit charge rate = (last 10-yr effective rate) × (number of complete quarters since the last 10-yr anniversary / 40). MAXIMUM EXIT CHARGE RATE: the 10-yr periodic charge itself is capped at 6% (30% × 20%). The exit charge is a proportion of the 10-yr rate — so the maximum exit charge rate is also 6% (if the exit occurs immediately after a full 10-yr period at the maximum 10-yr rate). | EXIT CHARGE — WORKED EXAMPLE: trust created 1 January 2015; 10-yr anniversary 1 January 2025. At the 2025 anniversary: relevant property value £600k; NRB £325k; prior CLTs nil. Notional transfer £600k; hypothetical IHT = (£600k − £325k) × 20% = £55k. Effective rate = £55k / £600k = 9.17%. Actual 10-yr rate = 30% × 9.17% = 2.75%. 10-yr charge = 2.75% × £600k = £16,500. EXIT CHARGE CALCULATION: on 1 April 2026 (6 complete quarters after the 2025 anniversary): the trust distributes £150k to a beneficiary. Exit charge rate = 2.75% × (6/40) = 0.4125%. Exit charge = 0.4125% × £150k = £619. Note: if the relevant property at the 2025 anniversary had been BELOW £325k: the effective rate = 0%; the 10-yr charge = nil; the exit charge rate = nil. Exit charge = £0. HMRC FORM IHT100 FOR EXIT CHARGES: where the trust distributes relevant property (an 'exit event'): the trustees must file IHT100 with HMRC within 6 months of the end of the month in which the exit occurs. | PLANNING EXIT CHARGES: (1) FUND BELOW NRB: if the trust fund stays below the NRB at the 10-yr anniversary: 10-yr charge = nil; exit charges for the next 10yr = nil. Distributions to beneficiaries are free of exit charges. (2) DISTRIBUTE BEFORE THE 10-YR ANNIVERSARY: exit charges in the first 10yr are lower than the 10-yr charge at the anniversary (they are a proportion of the hypothetical rate, scaled to the number of quarters elapsed). If the fund has grown significantly by year 10: distributing in years 7-9 may have a lower cumulative exit charge than the 10-yr periodic charge at year 10. (3) BUSINESS PROPERTY RELIEF (BPR) ON DISTRIBUTED ASSETS: if the trust distributes assets that qualify for BPR (qualifying business property): the exit charge is calculated on the NET VALUE after BPR. BPR reduces the value on which the exit charge is calculated. (4) DISTRIBUTIONS IN THE FORM OF ASSETS: where the trust distributes assets in specie (transferring assets directly to beneficiaries rather than selling and distributing cash): CGT hold-over relief (s260 TCGA 1992) may be available — the CGT on the gain within the trust is 'held over' to the beneficiary (the beneficiary takes the asset at the trust's original cost basis; no CGT on the transfer). Use hold-over relief to minimise CGT when distributing trust assets on which a gain has accrued. |
| Finance Act 2006 — the impact on interest in possession trusts | PRE-FA 2006 POSITION: before 22 March 2006, an interest in possession (IIP) trust (where a beneficiary had an immediate entitlement to trust income — the 'life tenant') was treated for IHT as if the life tenant owned the trust assets outright (s49 IHTA 1984 — the old rule). The life tenant was treated as beneficially entitled to the trust capital for IHT. On the life tenant's death: the trust assets were in the life tenant's estate (IHT at 40% above the NRB). The trust was NOT subject to the relevant property regime (no 10-yr charge; no exit charge). The IHT was all on the life tenant's death. FINANCE ACT 2006 CHANGES: Finance Act 2006 changed the IHT treatment of IIP trusts from 22 March 2006 (Budget Day 2006). From 22 March 2006: (1) NEW IIP trusts (created after 22 March 2006) are generally NO LONGER treated as if the life tenant owns the assets. Instead: a new IIP trust is treated as a relevant property trust — subject to the 10-yr periodic charge and exit charges. (2) EXISTING IIP trusts (in existence before 22 March 2006): grandfathered — they retain the pre-2006 treatment until the end of the existing IIP (until the current life tenant dies or the IIP ends). (3) EXCEPTIONS TO THE NEW RULE: certain new IIP trusts created after 22 March 2006 are STILL treated as if the beneficiary owns the assets (NOT relevant property): (a) Immediate Post-Death Interests (IPDIs — s49A IHTA): an IIP arising under a will or intestacy where the interest arises IMMEDIATELY on death and the life tenant is alive on the date of death. The IPDI life tenant is treated as beneficially entitled to the trust assets. (b) Transitional Serial Interests (TSIs — ss49B-49D IHTA). (c) Disabled person's interest (s89B IHTA). (d) Bereaved minor trust (s71A IHTA). | PRACTICAL IMPACT OF FA 2006: for most people considering creating a trust for a spouse (e.g., 'I want to leave my estate in trust so my wife can live in the house for life, then it goes to our children'): this is a NEW IIP trust (created on death, after 22 March 2006). The treatment depends on the timing: (1) IF THE WILL CREATES AN IPDI: the IIP arises immediately on death under the will (the wife's IIP arises from the date of death); the wife is treated as beneficially entitled to the trust assets (not relevant property). On the wife's death: the trust assets are in her estate for IHT. The tNRB (transferred NRB) and tRNRB can also be claimed. This is the most common structure for a surviving spouse trust in a modern UK will — the IPDI is the appropriate vehicle for a married couple's estate plan. (2) IF THE WILL CREATES A TRUST FOR A CHILD (not a spousal IPDI): a trust for an adult child giving the child an income interest = relevant property (new IIP post-FA 2006; no IPDI — the child is not an immediate post-death interest holder in the spousal context). The trust is subject to the 10-yr charge and exit charges. For children's trusts: a discretionary trust is often more appropriate (no nominal IIP to create complications). | WILL DRAFTING POST-FA 2006: (1) SPOUSE TRUSTS: use an IPDI trust (s49A IHTA) for the surviving spouse. The IPDI: (a) is created by the will (arises immediately on death); (b) the surviving spouse has an immediate income interest from the date of death; (c) treated as if the spouse owns the trust assets for IHT (not relevant property — no 10-yr charges). This is the standard 'life interest trust' in a modern UK will for married couples. Benefits: the trust assets are not immediately accessible to the surviving spouse (protecting them from care costs and remarriage claims), while the IHT position is the same as if the spouse inherited outright (assets in spouse's estate; tNRB available). (2) CHILDREN'S/GRANDCHILDREN'S TRUSTS POST-DEATH: if the will creates a trust for children or grandchildren after the surviving spouse's death: use a DISCRETIONARY trust (not an IIP for the children — a children's IIP is relevant property since FA 2006). The discretionary trust for children/grandchildren: subject to the relevant property regime; but will have its own NRB protection (nil 10-yr charge if trust fund is below NRB). (3) BEREAVED MINOR TRUSTS (s71A): for trusts for children under 18 who are bereaved (a parent has died): the s71A BMT trust is excepted from the relevant property regime — no 10-yr charge; no exit charge; child must become absolutely entitled at 18 or a contingency age. Used for minor children's shares under a deceased parent's will. |
Settled property and IHT UK 2026. s43 IHTA 1984: statutory definition of 'settled property'. s44 IHTA 1984: definition of 'settlor' — any person by whom the settlement was made; includes cases where property was provided indirectly or by associated operations (s268 IHTA). s45 IHTA 1984: 'trustee' means any person in whom the settled property is for the time being vested. s46 IHTA 1984: 'reverter to settlor' exception — where a trust ceases and the property reverts to the settlor or settlor's spouse (within 2yr): no charge. s47 IHTA 1984: application of Chapter II (IHT on settled property). s48 IHTA 1984: excluded property in a settlement — s48(3): non-UK situs assets in a settlement are excluded property if the settlor was non-LTUK/non-dom when the settlement was made. s48(3A): from 6 April 2017 (FA 2017), interests in close companies deriving value from UK residential property are not excluded property regardless of the settlor's LTUK status. s49 IHTA 1984 (pre-FA 2006): qualifying IIP — the life tenant is treated as beneficially entitled to the settled property (the trust assets are in the life tenant's estate). s49A IHTA 1984: Immediate Post-Death Interest — an IIP that (a) arose on the deceased's death; (b) arises immediately from death; (c) is held by an individual who was alive at the time of the deceased's death. An IPDI is treated as if s49 applies (the life tenant owns the assets for IHT). ss49B-49D IHTA 1984: Transitional Serial Interests — IIPs arising from pre-22 March 2006 IIPs that end and a new IIP begins (specific conditions apply). s58 IHTA 1984: definition of 'relevant property' — settled property in which no qualifying IIP subsists. ss58(1)(a)-(h): exceptions to relevant property treatment. s64 IHTA 1984: the 10-yr periodic charge — a charge on each 10th anniversary of the date the settlement commenced. s65 IHTA 1984: exit charges — charges when property ceases to be relevant property in the settlement. s66 IHTA 1984: the rate of the 10-yr periodic charge — 30% of the lifetime rate (20%) = 6% maximum on the excess above the NRB. s67 IHTA 1984: added property — treatment of property added to the trust after the settlement commenced. s68 IHTA 1984: provisional charges in the first 10yr (for exits before the first 10-yr anniversary). s69 IHTA 1984: property within the settlement more than once. s70 IHTA 1984: property leaving the settlement. s71 IHTA 1984: accumulation and maintenance trusts (pre-FA 2006 treatment for trusts for beneficiaries who would become absolutely entitled at 25 or younger). s71A IHTA 1984: bereaved minors' trusts — a trust under a will or intestacy for bereaved minors where the minor becomes absolutely entitled at 18. Excepted from relevant property charges. s89 IHTA 1984: trusts for disabled persons — property held on trust for a disabled person (within the s89(1) definition of disabled) is treated as if it were owned by the disabled person (s49 applies). Finance Act 2006: amended ss49-89 IHTA to fundamentally change the IHT treatment of IIP trusts created after 22 March 2006. New IIP trusts after 22 March 2006 = relevant property (unless IPDI, TSI, disabled, BMT). IHT100: HMRC form for reporting chargeable events in a settlement — including the 10-yr periodic charge (IHT100 plus supplement D) and exit charges (IHT100 plus supplement E). Filing deadline: within 12 months of the 10-yr anniversary (s264 IHTA). For exit charges: within 6 months of the end of the month in which the exit occurred. HMRC Trusts Registration Service: all UK express trusts must register (mandatory from 1 September 2022). CGT hold-over relief in trusts: s260 TCGA 1992 — hold-over relief available on distributions from discretionary trusts (or where there is an exit charge under s65 IHTA or a periodic charge under s64 IHTA). The gain is 'held over' to the beneficiary receiving the asset — no CGT on the in-specie distribution from the trust. s261 TCGA 1992: hold-over relief restrictions. Trust CGT annual exempt amount: £1,500 for trustees of a discretionary trust (from April 2024).
Frequently Asked Questions
What is settled property for inheritance tax purposes?
Settled property is property held in trust — defined in s43 IHTA 1984 as property held on trust for persons in succession (e.g., a life interest followed by a remainder), for a person subject to a contingency (e.g., 'to A at age 25'), or in a discretionary trust where no beneficiary has immediate absolute entitlement. Settled property includes property in any of these arrangements: lifetime discretionary trusts, will trusts, pilot trusts, offshore trusts, accumulation trusts, and interest in possession trusts (though the IHT treatment varies by trust type). Settled property held in a 'relevant property' trust (most discretionary trusts and new IIP trusts created after FA 2006) is subject to the 10-year periodic charge (s64 IHTA — max 6%) and exit charges (s65 IHTA) rather than IHT on the settlor's or beneficiaries' death.
What is the 10-year periodic charge on a discretionary trust?
The 10-year periodic charge (s64 IHTA 1984) is charged on each 10th anniversary of the date the settlement (trust) was created. It applies to relevant property — property in most discretionary trusts and post-FA 2006 interest in possession trusts. Rate: up to 6% of the relevant property value above the available nil-rate band (£325k). Calculation: (1) notional transfer = trust value + related settlements + prior CLTs by the settlor in the 7yr before settlement; (2) hypothetical IHT at 20% on excess above NRB; (3) effective rate = hypothetical IHT / notional transfer; (4) actual rate = 30% × effective rate; (5) charge = actual rate × relevant property value. If the trust fund (including any related settlements and same-day additions) is below the NRB (£325k) at the 10-yr anniversary: the charge is NIL. Exit charges for the following 10yr are also nil. Form IHT100 must be filed at each 10-yr anniversary.
What is an excluded property trust and how does it avoid UK IHT?
An excluded property trust is a settlement (trust) whose assets are excluded from UK IHT under s48(3) IHTA 1984. Non-UK situs assets (overseas investments, foreign property) held in a settlement are excluded property if the settlor was NOT Long-Term UK Resident (LTUK — not UK resident for 10 of the last 20 tax years, under Finance Act 2025) when the settlement was made. The key rule: the settlor's LTUK status at the TIME THE TRUST WAS CREATED determines excluded property status — even if the settlor later becomes LTUK. An excluded property trust: pays no UK IHT; no 10-yr periodic charges (s64 IHTA); no exit charges (s65 IHTA). The planning window: create the offshore trust before reaching 10yr UK residence. Finance Act 2017 restriction: UK residential property in an offshore trust is NOT excluded property (s48(3A) IHTA) — regardless of the settlor's LTUK status at settlement. Additional assets added to the trust after the settlor becomes LTUK are not excluded property (only the original settled assets retain excluded status).
Did Finance Act 2006 change the IHT treatment of interest in possession trusts?
Yes — significantly. Before 22 March 2006 (Budget Day 2006): an interest in possession (IIP) trust was treated as if the life tenant (the beneficiary with the income entitlement) owned the trust assets for IHT. The trust assets were in the life tenant's estate; no 10-yr or exit charges. Finance Act 2006: from 22 March 2006, most NEW IIP trusts are treated as relevant property — subject to the 10-yr periodic charge and exit charges. The life tenant is NOT treated as owning the assets for IHT. Exceptions (still treated as if the life tenant owns the assets — not relevant property): (1) Immediate Post-Death Interests (IPDIs — s49A IHTA): IIP arising immediately on death under the will; (2) Disabled person's interests (s89B IHTA); (3) Transitional Serial Interests (ss49B-49D IHTA). Pre-22 March 2006 IIP trusts: grandfathered under the old rules until the current life tenant dies or the IIP ends.
What is an exit charge from a discretionary trust?
An exit charge (s65 IHTA 1984) is a tax charge that arises when relevant property leaves a trust — for example, when the trustees make a capital distribution to a beneficiary. The charge is a proportion of the last 10-yr effective rate, scaled by the number of complete quarters elapsed since the last 10-yr anniversary. Formula: exit charge rate = (last 10-yr effective rate) × (complete quarters since anniversary / 40). If the trust fund was below the NRB at the last 10-yr anniversary (nil 10-yr charge): the exit charge rate = nil. Exit charges are always lower than the 10-yr periodic charge itself (they are a proportion of it). Where the trust makes an in-specie distribution of qualifying business property (BPR assets): the exit charge is calculated on the net value after BPR. CGT hold-over relief (s260 TCGA) is usually available on in-specie distributions from a discretionary trust — the gain is held over to the beneficiary.
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