Inheritance tax on trusts: the 10-year charge explained

The trust charges in one paragraph

A discretionary trust does not wait for anyone to die before inheritance tax gets involved. It sits inside what HMRC calls the relevant property regime, a self-contained system with three charges of its own: a possible 20% entry charge when assets go in, a periodic charge of up to 6% on every tenth anniversary of the trust's creation, and exit charges when capital comes out in between. The 6% is a ceiling, not a flat rate. Many trusts pay far less, and a trust whose value stays within the £325,000 nil-rate band often pays nothing at all. This guide walks through who the regime catches, where the 6% figure comes from, and what trustees actually have to do when an anniversary approaches, with a simplified worked example.

One thing to hold onto throughout: this is a genuinely technical corner of inheritance tax. The real calculation reaches back into the settlor's gift history and historic trust values, so treat every number here as an illustration of the mechanic rather than a substitute for a professional computation. The inheritance tax rules in this article apply across the UK, while our probate content elsewhere focuses on England and Wales; either way, what follows is general information, not legal or financial advice.

The relevant property regime: three charges, one design

Under the ordinary rules, inheritance tax bites once a generation, at 40% on death above the available allowances. Assets locked inside a discretionary trust could, in principle, sidestep that forever: nobody owns them outright, so nobody's death triggers a charge. The relevant property regime exists to plug that gap. Per GOV.UK's guidance on trusts and inheritance tax, "relevant property" means assets such as money, shares, houses or land held in trusts within the regime, and those assets face:

Charge	When	Rate
Entry charge	Assets are settled into the trust during the settlor's lifetime	20% on the amount above the available nil-rate band
10-year (periodic) charge	Every tenth anniversary of the trust's creation	Up to 6% of the chargeable value, recalculated each decade
Exit charge	Capital leaves the trust between anniversaries	A time-apportioned fraction of the anniversary rate

The design logic is neat once you see it. A generation is roughly 30 years. A 20% charge going in, followed by three 10-year charges of up to 6% each, adds up to something in the region of the 40% a death would have produced. HMRC's Inheritance Tax Manual at IHTM42085 describes the regime in exactly those terms: a charge of 40% once a generation, delivered in instalments rather than at a funeral.

Which trusts are caught, and which escape

The regime is usually described as the discretionary trust regime, and discretionary trusts of every vintage are its core population. But since 22 March 2006 the net has been much wider: almost any trust created in lifetime on or after that date, including most new interest in possession trusts, holds relevant property. If no beneficiary has an absolute right to the trust assets, assume the regime applies until a specialist tells you otherwise.

The main escapes, confirmed on GOV.UK, are:

• Bare trusts. The beneficiary owns the assets outright for tax purposes, so there is no relevant property and no periodic charge. This matters for life insurance: a policy written into a bare or absolute trust behaves very differently from one written into a discretionary trust, as our guide to life insurance written in trust explains. A discretionary policy trust is relevant property, and a large payout landing in it shortly before an anniversary can create a real periodic charge.
• Trusts for disabled people. No 10-yearly charge and no exit charge.
• Trusts for bereaved minors set up under a parent's will: no inheritance tax charges while the assets are held for the child to take at 18.
• 18-to-25 trusts. The 10-yearly charges do not apply, though an exit-style charge can arise on capital leaving between the beneficiary's 18th and 25th birthdays.
• Interest in possession trusts created before 22 March 2006, for assets settled before that date. These stay under the older rules, where the trust fund is treated as part of the life tenant's estate instead.

The entry charge: 20% above the nil-rate band

Putting assets into a relevant property trust during your lifetime is a chargeable lifetime transfer, not a potentially exempt transfer, so it does not enjoy the wait-and-see treatment of an outright gift under the 7-year rule. Instead, to the extent the amount settled (together with other chargeable transfers in the previous seven years) exceeds the £325,000 nil-rate band, inheritance tax is due immediately at the lifetime rate of 20%, half the 40% death rate.

Settle £300,000 into a discretionary trust with a clean gift history and no entry charge arises, because you are within the nil-rate band. Settle £425,000 and the top £100,000 is chargeable: £20,000 at 20%, assuming the trustees pay the tax. (If the settlor pays it instead, the transfer is grossed up and the bill is higher, one of several traps in this area.) And the seven-year clock still matters: die within seven years of the transfer and additional tax can be due at death rates, with taper relief potentially softening it. Our IHT threshold calculator is a quick way to see how much nil-rate band a gift history leaves available.

The 10-year charge, and why the ceiling is 6%

The periodic charge, which the legislation calls the principal charge, falls due on every tenth anniversary of the date the trust was set up. Per GOV.UK's detailed trusts guidance, it is charged on the net value of the relevant property in the trust on the day before the anniversary, after deducting debts and reliefs such as Business or Agricultural Relief, and only where that value exceeds the inheritance tax threshold.

Here is the mechanic, heavily simplified. HMRC's manual at IHTM42085 sets out the formula:

1. Work out a notional tax bill. Take the trust's chargeable value, deduct the available nil-rate band, and apply the 20% lifetime rate. Notional tax = (value minus available nil-rate band) x 20%.
2. Convert it to an effective rate. Divide that notional tax by the trust's total chargeable value. Because only the slice above the nil-rate band was taxed, this effective rate is always below 20%.
3. Charge the trust 30% of the effective rate. This is the actual anniversary rate applied to the relevant property.

The ceiling now explains itself. The effective rate can approach, but never reach, the full 20% lifetime rate, and 30% of 20% is 6%. A trust would need to be enormous relative to the nil-rate band to get near the ceiling; most real trusts land well below it. And where the trust's chargeable value sits entirely within the available nil-rate band, the notional tax is nil and so is the charge, which is why £325,000 has become a popular ceiling for trust funding. The word "available" is doing serious work in that sentence, though: the nil-rate band is reduced by the settlor's chargeable transfers in the seven years before the trust began and by certain distributions the trust made in the previous ten years, and anti-avoidance rules aggregate related trusts and same-day additions. This is exactly where DIY calculations go wrong.

A simplified worked example

The figures below are deliberately clean: one trust, one settlor with no prior gifts, no related settlements, no reliefs. Real computations are rarely this tidy, so treat this as a picture of the shape, and get a specialist to produce the exact figure for any actual trust.

2016: A settlor puts £425,000 into a discretionary trust for her grandchildren, having made no other chargeable transfers. The top £100,000 exceeds the nil-rate band, so an entry charge of £100,000 x 20% = £20,000 is paid by the trustees.

2026, the first 10-year anniversary: The trust fund has grown to £600,000. Assume the full £325,000 nil-rate band is available.

• Notional tax: (£600,000 minus £325,000) x 20% = £55,000
• Effective rate: £55,000 ÷ £600,000 = 9.17%
• Anniversary rate: 30% x 9.17% = 2.75%
• Periodic charge: £600,000 x 2.75% = £16,500

So this trust pays 2.75%, less than half the 6% ceiling, and the same exercise repeats in 2036, 2046 and beyond with fresh values each time. Notice the trade-off: roughly £16,500 a decade, in exchange for keeping £600,000 outside anyone's estate and away from a 40% death charge. Whether that trade is worth it is a conversation for an adviser, not a blog post.

Exit charges: fortieths of the anniversary rate

When capital leaves the trust between anniversaries, a proportionate charge, usually called an exit charge, applies. Per IHTM42110, the rate can again be anything up to 6%, and it depends on whether the exit falls before or after the first 10-year anniversary. After an anniversary, the mechanic is a time apportionment: the trust borrows the rate set at the last anniversary and scales it by the number of complete quarters since, out of the 40 quarters in a decade.

Continuing the example: two years (8 complete quarters) after the 2026 anniversary, the trustees distribute £100,000 to a grandchild. The exit rate is 2.75% x 8/40 = 0.55%, producing a charge of £550. Two consequences of the design are worth knowing. Distributions made in the first three months after an anniversary (no complete quarter yet) carry no exit charge at all, and before the first anniversary the rate is based on the value originally settled rather than current value, so a trust funded within the nil-rate band can often make early distributions without any exit charge. Trustees should still take advice before relying on either point.

What trustees actually have to do

If you are a trustee and an anniversary is approaching, the periodic charge is an administrative event with a deadline, not just a tax concept:

• Value the trust. You need the net value of the relevant property on the day before the anniversary, after debts and reliefs. Land and unquoted shares may need formal valuations.
• Assemble the history. The settlor's chargeable transfers in the seven years before the trust began, distributions in the previous ten years, and any related settlements all feed the calculation. Old files matter.
• Report on form IHT100. Per GOV.UK, the anniversary is reported to HMRC on form IHT100 with the relevant event form, generally by the end of the sixth month after the anniversary, with the tax paid from trust funds.

Trustees are personally responsible for getting this right, in much the same way executors are for an estate; the two roles often overlap in practice, and our executors hub and probate pillar cover the estate side of that coin. For trusts connected to a family business, where Business Relief interacts with the anniversary calculation, our business owners hub is the place to start.

Where to go from here

The relevant property regime rewards early arithmetic: before an anniversary there is often scope to plan distributions around the quarter rules; after it, the rate is fixed for a decade. Start by checking how much nil-rate band is in play with our IHT threshold calculator, and see the inheritance tax pillar guide and our explainer on the UK inheritance tax threshold for the wider allowances picture. Then, for any real trust with a real anniversary date, the exact figure has to come from a full computation. The simplified example above ignored prior gifts, related settlements, undistributed income and reliefs, and any one of those can move the rate materially in either direction. That is work for an accountant or trust specialist with the trust deed and the settlor's gift history in front of them, and it is worth commissioning well before the anniversary rather than in the six-month reporting window after it. If you need that calculation done, or a second opinion on one, we can put you in touch with a specialist who handles relevant property computations.