Inheritance Tax and Trusts UK: How Every Trust Type Is Treated for IHT (2026)
Trusts and IHT interact differently depending on the trust type. A discretionary trust attracts periodic charges (up to 6% every 10 years) and exit charges — but avoids IHT on the settlor's death. An IPDI trust keeps the property in the life tenant's estate and can retain the RNRB. The critical warning: putting the home in a discretionary trust loses the RNRB — costing up to £70,000 in avoidable IHT.
| Trust Type | In Settlor's Estate? | Periodic / Exit Charges? | RNRB Available? | Key Use |
|---|---|---|---|---|
| Discretionary trust | No | Yes — up to 6% per 10yr (s64/65) | No — RNRB lost | Asset protection, blended families, IHT on 2nd death |
| IPDI trust (will trust) | In life tenant's estate | No | Yes — if remainder to descendants | Surviving spouse benefit; children as remaindermen |
| Bare trust | In beneficiary's estate | No | If beneficiary is a descendant | Gifts to minors; straightforward nominees |
| NRB discretionary trust (will trust) | No — outside survivor's estate | Minimal if below NRB | No — lost if home in trust | Use NRB on 1st death; care home protection |
| Discounted Gift Trust (lifetime) | No (beyond annuity retained) | Yes — relevant property | N/A (lifetime trust) | Large lump-sum IHT planning with income retained |
| Loan trust | Loan remains in estate | Yes — relevant property on fund | N/A | Capital growth outside estate; loan repayable on demand |
| Disabled person's trust (s89 IHTA) | In disabled beneficiary's estate | No | If beneficiary is descendant | Protected trust fund for disabled beneficiary |
| Spousal bypass trust (pension) | No — pension bypasses estate | No (pension trust rules) | N/A | Pension death benefits paid outside estate to trust |
2026/27. Discretionary trust entry charge: 20% CLT on amount above NRB. Periodic charge: up to 6% per 10yr on trust fund (s64 IHTA 1984). Exit charge: proportionate to periodic charge on capital distributions (s65 IHTA 1984). RNRB: £175,000 per person, frozen to 2030.
IHT and Trusts: Complete Guide
Discretionary trusts — the relevant property regime
A discretionary trust is a trust where the trustees have discretion over who benefits and when. Since 22 March 2006, most trusts (other than bare trusts and qualifying interest in possession trusts) fall within the 'relevant property regime' (s58 IHTA 1984). The relevant property regime charges IHT in three ways: (1) Entry charge (the CLT): when assets are placed into a discretionary trust during the settlor's lifetime, the gift is a Chargeable Lifetime Transfer (CLT) — immediately chargeable to IHT at 20% on the amount above the available NRB (£325,000). If death occurs within 7 years, the IHT is recalculated at the 40% death rate (with a 20% credit for the lifetime charge paid); (2) Periodic charge (s64 IHTA 1984): every 10 years from the date the trust was created, IHT is charged at up to 6% on the trust fund value. The 6% is the maximum — the actual rate depends on the 'relevant fraction' (a formula based on the trust value, NRB, and settlement history). Many NRB trusts have minimal periodic charges if the fund is below the NRB; (3) Exit charge (s65 IHTA 1984): when capital is distributed from the trust to a beneficiary, an exit charge applies — a fraction of the periodic charge rate, proportional to the time since the last periodic charge. Exit charges are typically small but must be assessed on each distribution.
Immediate Post-Death Interest (IPDI) trusts
An Immediate Post-Death Interest trust (IPDI — s49A IHTA 1984) is a trust created by a will where the surviving spouse (or other person) has an immediate interest in possession from the date of death. The key IHT feature: the trust property is treated as forming part of the life tenant's estate for IHT. This means: (1) On the first death, the property passes into the IPDI trust — the value is IHT-exempt under the spousal exemption (s18 IHTA 1984) if the life tenant is the surviving spouse; (2) On the life tenant's death, the trust property is treated as owned by the life tenant and charged to IHT as part of their estate. The NRB and RNRB of the life tenant apply; (3) The trustees pay the IHT from the trust fund. The RNRB can apply to the home held in an IPDI trust if the trust qualifies — the home passes to children as remaindermen on the life tenant's death. IPDI trusts are commonly used in second-marriage situations: the surviving spouse has the benefit of the assets during life, but the assets pass to children of the first marriage on death rather than to the second spouse's estate.
Bare trusts — treated as owned by the beneficiary
A bare trust (or nominee arrangement) is the simplest trust structure: the beneficiary has an absolute right to the trust assets, and the trustee holds the assets as a nominee only. For IHT purposes: (1) Bare trust assets are treated as owned by the beneficiary — they are in the beneficiary's estate, not the settlor's estate; (2) The gift of assets into a bare trust is a PET (Potentially Exempt Transfer — s3A IHTA 1984): IHT-free after 7 years from the date of the gift; (3) There are no periodic or exit charges for bare trusts — these are features of the relevant property regime, which does not apply to bare trusts; (4) Children's bare trusts: a bare trust for a minor child (JISA-style bare trust) means the assets are treated as owned by the child. If the settlor is a parent, income generated by the trust assets (above £100/year) is taxed as the parent's income for income tax until the child reaches 18 (parental settlement rules). Bare trusts are commonly used for: gifts to minors (where the trustee manages the assets until the child is 18); charitable appeals and collections; property nominee arrangements.
NRB discretionary trust — using the NRB on the first death
A Nil-Rate Band (NRB) discretionary trust is a trust created in the will, typically for the amount of the NRB (£325,000). Its purpose: use the NRB on the first death rather than relying entirely on the spousal exemption and transferred NRB. Pre-2007 purpose: before October 2007 (when the transferred NRB was introduced — s8A IHTA 1984), the NRB discretionary trust was the main tool for using both partners' NRBs. The first to die placed up to £325,000 into a discretionary trust; the survivor had access to the trust assets during their lifetime but the trust fund was outside the estate on the survivor's death. After October 2007: the transferable NRB (s8A) made the NRB trust less essential for simple estates — unused NRB transfers to the survivor automatically. The NRB trust is still useful for: protecting assets from care home fee assessments (the trust fund is outside the survivor's estate); providing asset protection in blended-family situations; preserving the NRB where the survivor remarries (on remarriage, only the new spouse's NRB is available — the first death's NRB has already been used). Critical RNRB warning: if the main home is placed in an NRB discretionary trust, the RNRB (up to £175,000) is LOST — the home is not passing directly to direct descendants. This can cost up to £70,000 per death. The NRB trust must be carefully structured to use other assets (cash, investments) rather than the family home.
RNRB and trusts — the most important interaction
The Residence Nil-Rate Band (RNRB — s8D IHTA 1984) is lost where the main home passes to a discretionary trust. The RNRB requires: the main home (or a proportion of it) to pass to direct descendants. A discretionary trust is NOT a direct descendant — it is a trust for the benefit of a class of beneficiaries (which may include direct descendants, but the property is not directly theirs). If the will places the home into an NRB discretionary trust: the RNRB is NOT claimed on the first death (up to £70,000 lost); the RNRB on the second death may also be affected. To retain the RNRB: direct the home to the surviving spouse absolutely (the RNRB transfers unused to the survivor — s8G IHTA 1984); or direct the home to children directly (claiming the RNRB on the first death if the estate is above the NRB); or use an IPDI trust rather than a discretionary trust (the home in an IPDI trust can qualify for RNRB where the remainder passes to children). The interaction between the RNRB and discretionary trusts is the most common IHT mistake in wills drafted before the RNRB was introduced in 2017 — older wills with NRB discretionary trusts that include the home should be reviewed and updated.
Other trust types and their IHT treatment
Additional trust types and their key IHT features: (1) Discounted Gift Trust (DGT): the settlor makes a gift into a trust (relevant property regime — CLT) but retains a right to a fixed income stream (annuity) for life. The gift value for IHT (the CLT) is discounted by the actuarial value of the retained income stream — a lower CLT than the full amount gifted into trust. The remainder of the trust fund is outside the estate (relevant property regime). Used for: large lump-sum IHT planning where the donor needs some income; (2) Loan trust: the settlor lends money to the trust at nil interest. The loan is repayable on demand — it remains in the estate as an asset (the loan receivable). The trust fund grows outside the estate; only the original loan (not the growth) is in the estate. The growth on the trust fund is outside the estate; (3) Spousal bypass trust: a trust nominated by the deceased to receive pension death benefits outside the estate. The trustees have discretion to benefit the surviving spouse and others. The pension payout goes into the trust — outside the estate, not subject to spousal bypass IHT. Used to prevent pension funds from inflating the surviving spouse's estate; (4) Disabled person's trust (s89 IHTA 1984): a trust for a beneficiary who is disabled (as defined). Treated as if the assets are owned by the disabled beneficiary — no periodic/exit charges. IHT on the trust assets is charged as part of the disabled beneficiary's estate.
Frequently Asked Questions
How are trusts taxed for inheritance tax in the UK?
IHT treatment of trusts depends on the trust type: (1) Discretionary trusts (relevant property regime — s58 IHTA 1984): assets are NOT in the settlor's estate; entry charge (CLT at 20% on amount above NRB); periodic charge every 10 years (up to 6% of trust value — s64); exit charge on capital distributions (s65); (2) IPDI trusts (s49A IHTA): trust property IS in the life tenant's estate; IHT charged on life tenant's death; (3) Bare trusts: treated as owned by the beneficiary — in the beneficiary's estate; no periodic/exit charges; (4) NRB discretionary trusts: use the NRB on first death; RNRB is LOST if the home is placed in the trust.
Does putting assets in a trust avoid inheritance tax?
Not automatically — it depends on the trust type and how it is set up. Discretionary trusts (relevant property regime): assets leave the settlor's estate but attract periodic charges (up to 6% every 10 years) and exit charges on distributions. There is no complete IHT avoidance — just different timing and rates of IHT. Bare trusts: the gift into trust is a PET — IHT-free after 7 years if the settlor survives. IPDI trusts: assets remain in the life tenant's estate. No trust structure completely avoids IHT — but trusts can manage when and how IHT is paid, preserve assets across generations, and use the NRB/RNRB efficiently.
What is the IHT periodic charge on a discretionary trust?
The periodic charge (s64 IHTA 1984) is levied every 10 years on the anniversary of the trust's creation. The maximum rate is 6% of the trust fund's value, but the actual rate depends on a formula ('relevant fraction') that takes into account the trust fund value, the NRB at the date of the charge, and the cumulative chargeable transfers made in the 7 years before the trust was established. For an NRB discretionary trust where the fund is below the NRB (£325,000), the periodic charge is often nil or minimal. The charge is paid from the trust fund; the trustees complete form IHT100 to report and pay the charge.
Does putting the home in a trust affect the RNRB?
Yes — significantly. The RNRB (s8D IHTA 1984) requires the main home to pass to direct descendants. A discretionary trust is NOT a direct descendant. If the home is placed in a discretionary trust (e.g., an NRB trust), the RNRB is LOST — up to £70,000 per person in unnecessary IHT. To retain the RNRB: direct the home to the surviving spouse outright (RNRB transfers to survivor); or direct the home to children directly; or use an IPDI trust (remainder to children — may qualify). Update any pre-2017 will that places the home in a discretionary trust.
What is an IPDI trust and is it better than a discretionary trust for IHT?
An Immediate Post-Death Interest (IPDI) trust (s49A IHTA 1984) is a trust created by will where the beneficiary has an immediate interest in possession from death. The key difference from a discretionary trust: IPDI trust assets are treated as part of the life tenant's estate (charged to IHT on the life tenant's death at their estate's IHT rate), while discretionary trust assets are subject to the 10-year periodic charges and exit charges. IPDI trusts: can be used for the surviving spouse and still qualify for the RNRB (if the home in the IPDI passes to children as remaindermen). Discretionary trusts: RNRB is lost if the home is in them. For most married couples, an IPDI trust for the home (with children as remaindermen) is more IHT-efficient than a discretionary trust.
Review Your Will — Discretionary Trust With the Home Could Cost £70,000
Many wills drafted before 2017 contain NRB discretionary trusts that include the home — costing the RNRB (up to £70,000). Update the will to direct the home correctly: to the surviving spouse outright (RNRB transfers), or to children directly (RNRB claimed on first death). WillSafe will kits for England and Wales make this easy.
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