Inheritance Tax on transfers into trust

Inheritance Tax may be due when assets are put into a trust. How much depends on the type and value of the trust, the value and timing of the transfer and whether the donor continues to benefit from the gift.

On this page:

What is a transfer into trust?
Working out if Inheritance Tax is due
How you pay your Inheritance Tax
Death within seven years of making a transfer
Inheritance Tax if you retain a benefit after making a gift into a trust
Gifts into a trust for someone who is disabled
Other useful links

What is a transfer into trust?

The person who puts assets into a trust is known as a ‘settlor’. A transfer of assets into a trust can include property, land or cash in the form of:

A gift made during a person’s lifetime.
A transfer or transaction that reduces the value of the settlor’s estate (for example an asset is sold to trustees at less than its market value) - the loss to the person’s estate is considered a gift or transfer.
A ‘potentially exempt transfer’ - whereby no further Inheritance Tax is due if the person making the transfer survives at least seven years. For transfers after 22 March 2006 this will only apply when the trust is a disabled trust.
A ‘gift with reservation’ - where the transferee still benefits from the gift (see the section below).

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Working out if Inheritance Tax is due

For most types of trust Inheritance Tax is due on transfers that exceed the Inheritance Tax threshold. You work this out by adding the value of the transfer (which is based on the loss in value to the settlor’s estate) to any chargeable gifts made in the previous seven years by the settlor and paying tax on everything above the threshold (£312,000 in 2008-09).

If the trustees pay, the rate is 20 per cent.

If the settlor pays the Inheritance Tax instead of the trustee, the loss to the settlor’s estate is increased by the amount of tax due. Calculations are complex but effectively this means that the settlor pays at a rate of 25 per cent.

Example

A transfer of £50,000 is made into a trust in June 2008. In the previous seven years the settlor had made gifts of £300,000. So, the Inheritance Tax due is:

the value of the transfer + chargeable gifts = (£50,000 + £300,000) = £350,000
less the Inheritance Tax threshold = (£350,000 - £312,000) = £38,000
if the tax will be paid by the trustee, multiply by the Inheritance Tax rate = (£38,000 x 20 per cent) = £7,600
if the tax will be paid by the settlor = £38,000 x 25 per cent = £9,500

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How you pay your Inheritance Tax

If your transfer into a trust incurs an Inheritance Tax charge, you will need to fill in form IHT100 and complete a separate event form, IHT100a, which covers gifts and other transfers of value.

Find out more about completing form IHT100 Inheritance Tax Account

Find out about paying Inheritance Tax

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Death within seven years of making a transfer

If you die within seven years of making a transfer into a trust extra Inheritance Tax will be due at the full amount of 40 per cent (rather than the reduced amount of 20 per cent for lifetime transfers).

In this case your personal representative - who manages your estate when you die - will have to pay a further 20 per cent out of your estate on the value of the original transfer.

If no Inheritance Tax was due when you made the transfer, the value of the transfer is added to your estate when working out whether any Inheritance Tax is due.

Find out more about Inheritance Tax and trusts following a death

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Inheritance Tax if you retain a benefit after making a gift into a trust

If you make a gift to any type of trust but continue to benefit from the gift - for example, you give away your house but continue to live in it - you will pay 20 per cent on the transfer and the gift will still count as part of your estate. These are known as gifts ‘with reservation of benefit’.

This creates a situation where there are two potential Inheritance Tax charges:

when the gift is transferred into a trust
when the person who makes the transfer dies - because the asset is still considered part of their estate

To avoid double taxation, only the higher of these charges is applied - in other words you won’t ever pay more than 40 per cent Inheritance Tax.

However, if the person who retains the benefit gives this up more than seven years before dying, the gift is treated as a potentially exempt transfer. In other words, there is no further liability if the transferor survives for a further seven years.

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Gifts into a trust for someone who is disabled

You don’t have to pay Inheritance Tax immediately if you make a gift to a trust for someone who is disabled.

However, bear in mind that these sorts of gift count as 'potentially exempt transfers'. This means that if you die within seven years of making the gift, Inheritance Tax on the full amount of the transfer will still be due on your estate at 40 per cent.

You can read about how Inheritance Tax applies to trusts for someone who is disabled in our guide below.

Trusts that do and don’t pay Inheritance Tax

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