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There may be Inheritance Tax to pay when assets - such as money, land or buildings - are transferred into or out of trusts or when they reach a ten-year anniversary. This guide looks at the key principles that determine whether a trust needs to pay Inheritance Tax in these situations.
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Inheritance Tax is commonly understood as the tax paid on your estate when you die. However, it can also apply to your estate while you're alive, especially if you transfer some or all of it into a trust.
Inheritance Tax is only due if the assets in the trust are valued above the Inheritance Tax threshold (£325,000 in the 2013-14 tax year).
Rates and Allowances - Inheritance Tax
The act of putting an asset - such as money, land or buildings - into a trust is often known as 'making a settlement' or 'settling property'. For Inheritance Tax purposes, each asset has its own separate identity.
This means, for example, that one asset within a trust may be for the trustees to use at their discretion and therefore treated like a discretionary trust. Another item within the same trust may be set aside for a disabled person and treated like a trust for a disabled person. In this case, there will be different Inheritance Tax rules for each asset.
Even though different assets may receive different tax treatment, it is always the total value of all the assets in a trust that is used to work out whether a trust exceeds the Inheritance Tax threshold and whether Inheritance Tax is due.
You can find out about the Inheritance Tax rules for different kinds of trust in the guide below.
Trusts that do and don't pay Inheritance Tax
There are four main situations when Inheritance Tax may be due on trusts:
Inheritance Tax on transfers into trust
Inheritance Tax due on trust ten year anniversaries
Inheritance Tax on assets transferred out of trust
Inheritance Tax and trusts following a death
You have to pay Inheritance Tax on 'relevant property'. Relevant property covers all settled property in most kinds of trust. But property in the following types of trust doesn't count as 'relevant property':
You can find out about relevant property and relevant property trusts in the guide below.
Trusts that do and don't pay Inheritance Tax
Some assets are classed as 'excluded property' and Inheritance Tax is not paid on them. However the value of the assets may be brought in to calculate the rate of tax on certain exit charges and ten-year anniversary charges. Types of excluded property can include:
The rules governing excluded property can be complicated. For further technical guidance, you can use the HM Revenue & Customs (HMRC) online Inheritance Tax manual.
Technical guidance on excluded property
There are two main forms you will need to use to declare and pay Inheritance Tax for your trust:
Find the right Inheritance Tax and probate forms
Completing form IHT100 Inheritance Tax Account
Understanding trusts can be difficult so you may want to work with a solicitor or tax adviser. Remember though that the trustee is still legally responsible for the trust's tax affairs. You'll find some links below to professional organisations - although not all professionals are registered with them.
If you want HMRC to communicate with your agent or professional representative on Income Tax and Capital Gains Tax matters, you'll need to fill in form 64-8. Follow the link below to find out more about completing form 64-8.If you want HMRC to communicate with your agent or professional representative on Inheritance Tax issues you'll need to enter their details on form IHT100.
Find a solicitor on the Law Society of England and Wales website (Opens new window)
Find a solicitor on the Law Society of Northern Ireland website (Opens new window)
Find a solicitor on the Law Society of Scotland website (Opens new window)
Get help from the Society of Trust and Estate Practitioners - STEP website (Opens new window)
Find out more about completing form 64-8
Introduction to Inheritance Tax
