Trusts and Inheritance Tax: How the Relevant Property Regime Works

A trust can face inheritance tax at up to three separate points, and which ones apply depends on the type of trust. For most discretionary and modern lifetime trusts, there is a potential charge when assets go in (the entry charge), a charge on every ten-year anniversary while assets sit in the trust (the principal or ten-year charge), and a charge when capital comes out (the exit charge). This three-point structure is called the relevant property regime, and it exists so that assets held in trust cannot escape IHT indefinitely just because there is no individual owner who will die and trigger a 40% charge.

The assets held on these terms are called "relevant property". HMRC describes relevant property broadly as money, shares, houses or land held in the trust. The charges are deliberately lighter than the 40% death rate: the entry rate is 20% and the periodic and exit rates are capped at 6%. That trade-off, spreading smaller charges across the life of the trust rather than one large charge on death, is central to how trust IHT is designed.

Not every trust works this way. Bare trusts are broadly transparent, and interest-in-possession trusts created before 22 March 2006 (or qualifying ones created since) are taxed by reference to a beneficiary's estate instead. Those exceptions are covered below. It is also worth distinguishing this domestic picture from offshore structures: the taxation of non-UK trusts and the excluded-property rules changed fundamentally on 6 April 2025 (moving from a domicile basis to a long-term UK residence basis) and are covered in our offshore-trusts guide.

The relevant property regime is the default IHT treatment for most lifetime trusts, including discretionary trusts and, since 22 March 2006, most new interest-in-possession trusts. Under it, the trust itself is the unit that is taxed, rather than any individual beneficiary, because in a discretionary trust no beneficiary has an absolute right to the capital. Instead of waiting for a death, HMRC applies periodic charges so that value cannot sit sheltered in trust across generations without contributing IHT.

The engine of the regime is that each trust has its own nil-rate band, currently GBP 325,000 and frozen at that level until 5 April 2031. Charges only bite on the value of relevant property above that band. A trust holding GBP 300,000 of relevant property, with no history of prior gifts by the settlor, may therefore face no ten-year charge at all. Because the band is per-trust, the regime rewards careful timing and structuring, but anti-avoidance rules stop the allowance being multiplied artificially.

• Related settlements: trusts set up by the same settlor on the same day are treated as related, and their value is taken into account when working out the nil-rate band available to each, so same-day trusts do not each get a fresh GBP 325,000.
• Same-day additions: adding property to more than one trust on the same day can similarly reduce the available band.
• Prior chargeable transfers: gifts the settlor made into other relevant property trusts in the seven years before creating this one reduce the nil-rate band available to it.

The entry charge applies when you transfer more than the available nil-rate band into a relevant property trust during your lifetime. The rate is 20% on the excess above GBP 325,000, and it is charged immediately because a gift into a discretionary trust is a "chargeable lifetime transfer" rather than a potentially exempt transfer. HMRC confirms that where the trustees pay, the rate of tax is 20%; where the settlor pays the tax out of their own funds, the figure is grossed up so the effective rate is 25%, because the tax itself is also a loss to the estate.

The 20% rate is exactly half of the 40% death rate. The logic is that the entry charge is a payment on account against the tax that would otherwise fall due later. If the settlor dies within seven years of making the transfer, the transfer is reassessed at the full death rate, with credit given for the 20% already paid, so an early death can bring an additional charge. Transfers within the available nil-rate band carry no entry charge, which is why many settlors deliberately keep gifts into trust at or below GBP 325,000 (and space them at least seven years apart to refresh the band).

The value transferred also uses the settlor's remaining nil-rate band after any chargeable gifts in the previous seven years, so someone who has already used their band on an earlier trust will see the 20% charge apply from the first pound. Business and agricultural property may reduce the value that is charged, but note the reforms below now cap that relief.

Every ten years from the date a relevant property trust is created, the trustees must review whether an IHT charge is due. HMRC calls this the principal charge or ten-year anniversary charge. It is charged on the net value of the relevant property in the trust on the day before the anniversary, and only on the amount above the trust's available nil-rate band. The maximum rate is 6%, but the effective rate is almost always lower once the nil-rate band and the calculation method are applied.

The 6% figure comes from applying an "effective rate" that is 30% of the lifetime 20% rate (30% of 20% equals 6%). Because the first GBP 325,000 is sheltered by the nil-rate band, a trust worth GBP 650,000 would only be charged on the top GBP 325,000, so the actual tax as a proportion of the whole fund is around 3%, not 6%. The calculation is genuinely intricate: it draws in the settlor's chargeable gifts in the seven years before the trust started, any related settlements, and any capital that has already left the trust in the current ten-year period.

• The charge is worked out on the value of relevant property immediately before the anniversary, less the available nil-rate band.
• The maximum rate is 6%; the actual effective rate is usually a few per cent.
• Trustees report and pay using form IHT100d, and the charge is due within six months of the end of the month in which the anniversary falls.
• From the first ten-year anniversary on or after 6 April 2026, business and agricultural relief inside trusts is subject to the new GBP 2,500,000 combined allowance (see reforms below).

An exit charge (also called a proportionate charge) can arise when capital leaves the trust, for example when trustees pay or appoint assets out to a beneficiary. HMRC confirms IHT is charged up to a maximum of 6% on assets such as money, land or buildings transferred out of a trust. Crucially, the charge is proportionate: it reflects how many complete three-month periods (quarters) have elapsed since the trust was created or since the last ten-year anniversary, so property that leaves early in a cycle attracts a smaller charge than property that leaves just before an anniversary.

There are two common patterns. Where an exit happens in the first ten years, the rate is based on the effective rate that would have applied at the outset, scaled for the number of complete quarters since the trust began. Where an exit happens after a ten-year anniversary, the rate is a fraction of the rate that was charged at the most recent anniversary, again scaled for elapsed quarters. If no ten-year charge was payable (because the fund sat within the nil-rate band), the exit charge in the following period is typically nil, which is a key planning point for smaller trusts.

Distributions of income to beneficiaries do not trigger an exit charge, because only capital leaving the relevant property fund is caught. Payments in the first three months after the trust starts or in the first quarter after a ten-year anniversary can also fall outside the charge because no complete quarter has elapsed.

Not all trusts sit in the relevant property regime, and the difference matters enormously for IHT. A bare trust is one where the beneficiary is absolutely entitled to both the income and the capital, with the trustee holding legal title only as a nominee. For IHT, a bare trust is broadly transparent: putting assets into a bare trust is treated as an outright gift to the beneficiary, so it is a potentially exempt transfer that falls out of the estate if the settlor survives seven years, and there are no entry, ten-year or exit charges. Bare trusts are common for holding assets for a child until adulthood.

An interest-in-possession (IIP) trust is one where a named beneficiary (the "life tenant") is entitled to the income as it arises, for example the right to live in a property or receive investment income for life. The IHT treatment turns on timing. For assets put into an IIP trust before 22 March 2006, the life tenant is treated as owning the underlying capital, so the value forms part of their estate on death rather than being caught by the relevant property regime. These pre-2006 arrangements, and certain post-2006 trusts that qualify (such as immediate post-death interests set up by will, and some trusts for the disabled or bereaved minors), are known as qualifying interest-in-possession trusts.

For most IIP trusts created on or after 22 March 2006, however, the relevant property regime applies in the same way as for discretionary trusts, so the ten-yearly and exit charges are in point. This is why the date an interest-in-possession trust was set up, and whether it qualifies, is one of the first things to check. Settlor-interested trusts, where the settlor or their spouse can benefit, carry their own income tax and capital gains tax anti-avoidance rules and are covered in our dedicated settlor-interested trusts guide.

Given the entry, ten-year and exit charges, it is fair to ask why families still use trusts. The answer is that IHT efficiency is rarely the only, or even the main, objective. A trust lets you separate control from benefit: you can put assets beyond your own estate while trustees you choose decide when and how much reaches each beneficiary. For many families, that control is worth more than a marginal tax saving.

• Control and timing: trustees can hold capital back until a beneficiary is mature, reaches a milestone, or genuinely needs it, rather than handing a young person a large sum outright.
• Protection: assets in trust can be insulated from a beneficiary's divorce, creditors, bankruptcy or vulnerability, and from being dissipated.
• Generational planning: a trust can provide for a surviving spouse for life and then pass capital to children, or skip a generation, in a structured way.
• Providing for the vulnerable: trusts for disabled people and bereaved minors have special, favourable IHT treatment.
• Business continuity: family or business assets can be held collectively rather than fragmented among many individual owners.

The charges are also modest in context. A well-structured trust often faces an effective ten-year charge of only a few per cent, against the 40% that would apply if the same assets sat in an individual's estate on death. Combined with the annual exemption of GBP 3,000, small gifts of GBP 250 per person, the normal-expenditure-out-of-income exemption and the spouse exemption (unlimited where the recipient is a UK long-term resident), trusts remain a core estate-planning tool.

Recent reforms make advice more important, not less. From 6 April 2026, 100% business relief and agricultural relief are capped at GBP 2,500,000 of combined qualifying property per person (GBP 5,000,000 for a married couple or civil partners, as the allowance is transferable between spouses), with 50% relief above that, and business relief on most shares that are not listed on a recognised stock exchange (such as AIM) falls from 100% to 50%; this cap also applies inside relevant property trusts at ten-year and exit charges. From 6 April 2027, most unused pension funds and death benefits are brought within the estate for IHT (with death-in-service benefits and certain defined-benefit dependants' pensions excluded). Both changes should be checked against your own facts before acting, and figures for your estate should be confirmed with an adviser.