Inheritance Tax and trusts following a death

When someone dies, the job of managing their estate may involve trusts. The deceased may have wanted their assets put into trust when they die. Or part of their estate may have already been held in trust. This guide looks at the Inheritance Tax implications for personal representatives.

On this page:

Dealing with a trust when someone dies
Inheritance Tax when the deceased was the beneficiary of a trust
Inheritance Tax when the deceased transferred assets into a trust before they died
Inheritance Tax where a trust is set up by a will
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Dealing with a trust when someone dies

Settling someone’s estate can be complicated. Amongst their many duties, the person nominated to sort out the deceased’s estate (the ‘personal representative’ who can be either an ‘executor’ or an ‘administrator’) must know the total value of the estate and pay Inheritance Tax on everything above the Inheritance Tax threshold (£312,000 for the tax year 2008-09). This can become more complicated when a trust is involved.

There are three main ways that a personal representative may have to deal with a trust when thinking about paying Inheritance Tax.

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Inheritance Tax when the deceased was the beneficiary of a trust

Some trusts are set up so that the beneficiary has ownership or legal entitlement to the income or assets in the trust. This will affect what’s included in the estate of the beneficiary when they die.

Beneficiary of a bare trust

A bare trust is one where the beneficiary is entitled to both the income and the assets in the trust. Therefore, when they die, both income and assets are considered part of their estate. A personal representative needs to account for the value of the beneficiary’s estate, including their stake in the bare trust, on form IHT400. This form will determine whether there is Inheritance Tax to pay or not.

Beneficiary of an interest in possession trust

An interest in possession trust is one where the beneficiary is entitled to only the income from a trust. When they die, there are certain circumstances where the value of this ‘interest in possession’ is calculated as part of their estate. These include when the trust:

was set up before 22 March 2006
was set up after 22 March 2006 and was either an ‘immediate post death interest’, a ‘disabled person’s interest’ or a ‘transitional serial interest’

A personal representative needs to account for the value of an ‘interest in possession’ on form IHT400 at questions 45 and 75. The personal representative will need to liaise with the trustees to obtain this information. This will determine whether there is Inheritance Tax to pay or not.

Note that it is the trustees’ duty to complete an IHT100 Inheritance Tax Account form, which must also be completed when an interest in possession comes to an end.

Find out about which trusts do and don’t pay Inheritance Tax

Get form IHT400 Inheritance Tax Account

Find out more about completing form IHT100 Inheritance Tax Account

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Inheritance Tax when the deceased transferred assets into a trust before they died

Lifetime transfers of assets into a trust may incur an immediate Inheritance Tax charge of 20 per cent (depending on certain factors - follow the link at the end of this section to check the rules). However, a further Inheritance Tax charge may be due on the same transfers if the person who made them dies within seven years.

The personal representative must therefore find out whether the deceased made any transfers into trust in the seven years before they died. If they did, and they paid 20 per cent Inheritance Tax, the personal representative is liable for an additional 20 per cent. This applies for every relevant transfer. The personal representative must declare this on form IHT400 at question 28.

Even if no Inheritance Tax was due on the transfer its value must be added to the deceased’s estate for Inheritance Tax purposes.

Find out more about Inheritance Tax on transfers into trust

Get form IHT400 Inheritance Tax Account

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Inheritance Tax where a trust is set up by a will

Someone may request in their will that, when they die, some or all of their assets are placed in a trust. A trust that is set up under these circumstances is known as a ‘will trust’. Where there is a will trust, the personal representative must ensure that the trust is set up properly and all taxes are paid on assets going into it.

Once set up, it is the trustees’ duty to account for Inheritance Tax on any subsequent transfers into or out of the trust. They do this using the IHT100 Inheritance Tax Account form.