Introduction to Inheritance Tax and trusts

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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What is Inheritance Tax?

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 2011-12 tax year).

Find out more about Inheritance Tax rates and thresholds

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Inheritance Tax and settled property

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.

Find out which trusts do and don't pay Inheritance Tax

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When you might have to pay Inheritance Tax on your trust

There are four main situations when Inheritance Tax may be due on trusts:

  • when assets are transferred - or settled - into a trust
  • when a trust reaches a ten-year anniversary of when it was set up
  • when assets are transferred out of a trust or the trust comes to an end
  • when someone dies and a trust is involved when sorting out their estate

Inheritance Tax on assets transferred into trust

Inheritance Tax on trust ten-year anniversaries

Inheritance Tax on assets transferred out of trust

Inheritance Tax and trusts following a death

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Assets you pay Inheritance Tax on

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':

  • interest in possession trusts with assets that were put in before 22 March 2006
  • an immediate post-death interest trust
  • a transitional serial interest trust
  • a disabled person's interest trust
  • a trust for a bereaved minor
  • an age 18 to 25 trust

You can find out about relevant property and relevant property trusts in the guide below.

Find out which trusts do and don't pay Inheritance Tax

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Assets you don't pay Inheritance Tax on

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:

  • property situated outside the UK - that is owned by trustees and settled by someone who was permanently living outside the UK at the time of making the settlement
  • government securities - known as FOTRA (free of tax to residents abroad)

The rules governing excluded property can be complicated. For further technical guidance, you can use the HM Revenue & Customs (HMRC) online Inheritance Tax manual.

Find technical guidance on excluded property

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Declaring and paying Inheritance Tax on trusts

There are two main forms you will need to use to declare and pay Inheritance Tax for your trust:

  • IHT400 Inheritance Tax Account - used to show what Inheritance Tax is due when someone has died
  • IHT100 Inheritance Tax Account - used to show what Inheritance Tax is due from 'lifetime events', for example a transfer into or out of a trust, or a ten-year charge on a trust

Get help with forms for probate and Inheritance Tax

Find out more about completing form IHT100 Inheritance Tax Account

Find out about paying Inheritance Tax

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Get professional help for your trust

Understanding trusts can be difficult. You may want to seek the advice of a solicitor or tax adviser. Remember though that the trustee is still legally responsible for making sure that the trust's tax affairs are dealt with completely and correctly. 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 trust 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 the relevant contact 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

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More useful information

Introduction to Inheritance Tax

Find out more about settled property and Inheritance Tax

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