Trusts and inheritance tax.

Most trusts set up during your lifetime are taxed under the relevant property regime. This covers discretionary trusts and most interest in possession trusts created on or after 22 March 2006.

• Entry charge: transfers into the trust above your available nil rate band of £325,000 are charged at 20%. If you do not survive 7 years, the tax is worked out again at the full rate of 40%, less any taper relief and the tax already paid. The trustees normally pay any extra, and your executors only become liable if it is left unpaid.
• 10-year charge: on every 10th anniversary of the trust, relevant property worth more than the nil rate band is charged at up to 6%.
• Exit charge: when assets leave the trust, a proportionate charge of up to 6% can apply.

Some trusts are outside the regime, including interest in possession trusts set up before 22 March 2006, and trusts for disabled persons and bereaved minors.

Non-UK assets held in a trust are excluded property, and outside these charges, while the settlor is not long-term UK resident. UK assets, including a UK home held through an overseas company, stay within the regime whoever set the trust up. See overseas settlors and non-UK trusts below.

Business and agricultural property held in trust can still qualify for relief, but the £2.5 million allowance from 6 April 2026 applies to trusts in different ways depending on the type of trust. We check this for each trust.

If you can benefit from the trust yourself, the assets may still be treated as yours for inheritance tax under the gift with reservation rules. For the wider picture, see our inheritance tax planning page.

In a discretionary trust, the trustees decide which beneficiaries receive payments, how much and when. No beneficiary has a right to the income or capital until the trustees decide to pay it out.

People choose one to keep flexibility and control:

• you do not need to decide now which child or grandchild needs help, or when
• the assets are protected if a beneficiary divorces, runs into debt or is not ready to manage money
• growth on the assets builds up outside your estate, provided you cannot benefit yourself
• gifts of assets into the trust can usually qualify for capital gains tax hold-over relief

For example, a grandmother who has made no other large gifts in the last 7 years puts £300,000 of investments into a discretionary trust for her four grandchildren. Because the gift is within her nil rate band, there is no 20% entry charge. Years later the trustees pay university costs for one grandchild and help another with a first home deposit, choosing who needs help at the time. If she survives 7 years, the gift falls outside her estate.

The flexibility comes at a cost. The trust sits in the relevant property regime, so the entry, 10-year and exit charges apply. For income tax, discretionary and accumulation trusts pay 45% on most income and 39.35% on dividends in 2026/27. From 6 April 2027 the rate on rent and interest rises to 47%. Trusts do not get a dividend allowance.

Since 6 April 2024 there is no standard rate band for trusts. Instead, most trusts pay no income tax where income is £500 or less. If the settlor has more than one discretionary or accumulation trust, the £500 is shared between them, down to £100 each where there are 5 or more.

A bare trust is the simplest kind. The trustee holds the assets in their name, but the beneficiary is entitled to the capital and income outright and can take them at 18. For tax purposes the assets are treated as the beneficiary's, so the 10-year and exit charges do not apply.

People use one to give money to a child or grandchild in a simple, low-cost way that uses the young person's own allowances. A gift into a bare trust for someone else is a potentially exempt transfer, so it falls out of your estate after 7 years. The drawback is that the beneficiary takes everything at 18, whether or not they are ready.

For example, a grandfather puts £40,000 into a bare trust for his 8-year-old granddaughter. The income is taxed as hers, so with her personal allowance there is usually no tax to pay, and the gift falls outside his estate if he survives 7 years. At 18 she can take the money.

The rules are different for parents. Where a parent puts money into a trust for their own child under 18, income over £100 a year is taxed on the parent instead.

In an interest in possession trust, one beneficiary, often called the life tenant, is entitled to the income as it arises, or to use an asset such as a house, but not to the capital. The capital passes to other beneficiaries later, usually at the end of the life tenant's lifetime.

People use one to provide for someone for life while making sure the capital ends up where they choose. It is common in second marriages and in wills.

For example, a husband with children from his first marriage leaves his investments in his will on an interest in possession trust for his second wife. She receives the income for the rest of her life, and the capital then passes to his children. Because the trust is set up by will for his spouse, the spouse exemption applies at that point, and the trust capital is counted with her estate for inheritance tax later on.

Interest in possession trusts set up during your lifetime on or after 22 March 2006 fall within the relevant property regime, like discretionary trusts. Trustees pay income tax at 20% on most income and 10.75% on dividends in 2026/27, rising to 22% on rent and interest from 6 April 2027. The life tenant then includes the income on their own return.

Trustees pay capital gains tax at 24%. Most trusts have an annual exempt amount of £1,500, half the £3,000 an individual gets. It rises to £3,000 where the beneficiary is vulnerable, and is reduced where the settlor has made more than one settlement since 6 June 1978.

Capital gains tax can also apply when assets go into or leave a trust. Hold-over relief can defer the gain in some cases, which is one reason why choosing the right trust type matters.

Most UK express trusts must be registered on HMRC's Trust Registration Service, even if they pay no tax. Some are excluded, including a trust set up by a will that is wound up within 2 years and has no tax to pay.

UK trusts

• A non-taxable trust must be registered within 90 days of being set up.
• A taxable trust set up on or after 6 April 2021 must be registered within 90 days of becoming liable to tax.
• A trust set up before 6 April 2021 that first becomes liable to income tax or capital gains tax must register by 5 October after the end of that tax year.
• Where a trust is liable to other taxes, such as inheritance tax, registration is due by 31 January after the end of the tax year in which the liability arises.
• Changes must be reported within 90 days, and taxable trusts must confirm the register is up to date by 31 January after each tax year in which they are liable to tax.

Non-UK trusts

A trust run from outside the UK must also register if it:

• becomes liable to UK tax on UK income or assets, on the same deadlines as a UK trust
• acquired UK land or property after 6 October 2020, within 90 days of the purchase
• has at least one UK-resident trustee and enters a business relationship in the UK, for example with a UK bank, solicitor or accountant, within 90 days
• acquired UK land before 6 October 2020 and still held it on 30 June 2026, by 1 September 2027

Penalties can apply if a trust is not registered.

Trustees of a taxable trust file the SA900 trust and estate tax return each year. Paper returns are due by 31 October and online returns by 31 January after the tax year ends. Any tax is also payable on 31 January. Online filing needs commercial software. We prepare the return, calculate the tax and send R185 statements to beneficiaries.

From 6 April 2025, inheritance tax depends on long-term UK residence, not domicile. Broadly, you are long-term resident if you have been UK tax resident for at least 10 of the previous 20 tax years. Non-UK assets in a trust are only outside inheritance tax if the settlor is not long-term resident when a charge arises, or was not at the date of death. Older trusts may also benefit from a cap on charges. So a settlor's change in status can change how an existing trust is taxed. If the settlor has moved to or from the UK, the trust is worth reviewing alongside their international tax position.

Non-UK trusts with UK land, UK income or a UK-resident trustee may also need to register on the Trust Registration Service, as set out above.