How to Wind Up a Will Trust UK (2026): IHT Exit Charges & CGT

A will trust can be wound up in several circumstances: (1) Saunders v Vautier — if all beneficiaries are of full legal capacity (18 or over and of sound mind) and are together absolutely entitled to the entire trust fund (no future or contingent beneficiaries), they can together direct the trustees to transfer the trust assets to them and bring the trust to an end. (2) Natural expiry — the trust's own terms provide for termination, typically on the death of the last life tenant (a life interest trust), on a beneficiary reaching a specified age, or at the end of a fixed term. (3) Deed of appointment — the trustees, exercising a power of appointment, appoint the trust assets absolutely to one or more beneficiaries, eliminating all beneficial interests and collapsing the trust. (4) Deed of retirement/appointment of new trustees combined with a revocable trust — if the trust deed includes a power to revoke, the settlor (if still alive) may be able to revoke the trust, though this is unusual for testamentary trusts established under a will. (5) Court order — the court under s.57 Trustee Act 1925 (expedient management) or the Variation of Trusts Act 1958 may approve a scheme that effectively terminates the trust.

It depends on the type of trust. For discretionary trusts (relevant property trusts under IHTA 1984 Part III), an exit charge applies under section 65 whenever property leaves the trust — whether by distribution to a beneficiary, appointment out of the trust, or winding up. The exit charge is calculated as a proportion of the trust's 'effective rate' (the periodic charge rate calculated at the last 10-year anniversary or, for trusts less than 10 years old, at the rate applicable at entry) multiplied by the number of complete quarters since the last 10-year anniversary. The maximum rate is 6% (at the 10-year point), so exit charges are almost always significantly below 6%. For life interest (interest in possession) trusts created before 22 March 2006, and qualifying interest in possession trusts created after that date, exit charges work differently: the trust assets are treated as part of the life tenant's estate for IHT, so IHT is calculated at the life tenant's death, not as a separate exit charge on the trust. No exit charge applies to bare trusts (where beneficiaries are absolutely entitled) or bereaved minor trusts when assets vest on the child reaching the vesting age.

The exit charge under IHTA 1984 s.65 is calculated as follows: (1) Establish the trust's nil-rate band at the date of exit, the value of the property leaving, and the value of any related trusts set up by the same settlor on the same day. (2) Calculate the 'settlement rate' — for trusts past their first 10-year anniversary, this is the periodic charge rate most recently used; for trusts under 10 years old, it is calculated using the hypothetical rate that would have applied at the commencement. (3) The exit rate is: (effective rate × 30%) × (quarters elapsed since last anniversary ÷ 40). The maximum exit rate is 6% at an anniversary. In practice, most exits occur at rates of 0–3%. Example: a trust with an effective rate of 20%, 6 quarters after its last anniversary: exit rate = (20% × 30%) × (6 ÷ 40) = 6% × 0.15 = 0.9%. The calculation must be reported to HMRC on form IHT100c (exit charge) even if the resulting tax is nil, if the trust has a taxable value. A specialist accountant or solicitor should be engaged for the calculation.

Yes — a transfer of trust assets from trustees to beneficiaries is a disposal for CGT purposes under TCGA 1992 s.71 (at market value). This means the trustees may have a CGT liability on any gain above the trust's acquisition cost (or March 1982 value), calculated at the date of appointment to the beneficiary. The rate is 24% (for residential property) or 24% (for other assets, as at 2026, higher-rate trustee rate). However, hold-over relief under s.260 TCGA 1992 is available where the transfer triggers a chargeable IHT event — which includes any disposal from a discretionary (relevant property) trust, since such trusts attract the IHT exit charge. The trustees and beneficiaries elect jointly on form HS295; the gain is then held over and the beneficiary's base cost is reduced by the held-over gain, so they will pay CGT when they ultimately sell the asset. For life interest trusts, hold-over relief under s.260 is not available (no IHT charge on the trust itself); instead, the trustees may use s.165 hold-over relief if the asset is a qualifying business asset, or take the CGT hit on termination.

The rule in Saunders v Vautier [1841] EWHC Ch J65 provides that if all beneficiaries of a trust are: (a) adults (18 or over); (b) of sound mind; and (c) together absolutely entitled to the entire trust fund — with no other person having any interest in the trust, whether present, future, or contingent — they can unanimously direct the trustees to transfer the trust assets to them and end the trust. This is the most powerful tool for terminating a will trust without trustee cooperation or court involvement, but the requirements are strict. The rule fails if there is any contingent or future interest — for example, if a discretionary trust includes potential unborn children among its class of beneficiaries, or if there is a substitutional gift. In that case, the beneficiaries cannot use Saunders v Vautier without first excluding the contingent interest (e.g. by actuarial evidence that birth is impossible, or by a deed of variation narrowing the class). Under the Variation of Trusts Act 1958, the court can consent on behalf of any person with a contingent or future interest if the variation is for their benefit, enabling a scheme of arrangement that achieves the same result as Saunders v Vautier.

The practical steps for winding up a will trust are: (1) Trust audit — review the trust deed, all deeds of appointment and retirement, trustee meeting minutes, and trust accounts to confirm the current trustees, the extent of beneficial interests, and any outstanding liabilities. (2) Calculate IHT exit charge — if a relevant property (discretionary) trust, calculate and report the exit charge to HMRC on IHT100c before distributing. (3) Agree CGT position — establish the trust's CGT base costs, calculate any gains, and determine whether hold-over relief is available and desirable. (4) Prepare final trust accounts — a final set of accounts showing all assets, liabilities, income, and proposed distributions; beneficiaries should approve these. (5) Execute deed of appointment — if the trust deed permits, a deed of appointment (by the trustees) appoints assets absolutely to the named beneficiaries, collapsing the trust. Alternatively, use a trust termination deed that records the unanimous direction under Saunders v Vautier. (6) Transfer assets — conveyance of land must be registered at the Land Registry (using form TR1); shares are transferred using stock transfer forms; bank accounts are closed and balances paid to beneficiaries. (7) Notify HMRC — if the trust was registered with the Trust Registration Service (TRS), submit a closure notification.

Most express trusts must register with HMRC's Trust Registration Service (TRS) under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, as amended. When a trust is wound up, the trustees must notify the TRS of the trust's closure — this is done via the TRS online portal. The notification must be made within 90 days of the trust ceasing to exist (i.e. when all assets have been distributed and the trust has been formally wound up). The trustees must retain TRS records for 5 years after the trust is wound up in case of HMRC enquiry. Bare trusts created after 6 October 2020 that were required to register must also notify closure. A trust that was exempt from TRS registration (e.g. some charitable trusts, bare trusts holding financial instruments on behalf of a single beneficiary that were exempt under the 2022 regulations) should check whether the exemption means a closure notification is also not required.