In this section:
- Introduction to Inheritance Tax and trusts
- Trusts that do and don't pay Inheritance Tax
- 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
- Completing form IHT100 Inheritance Tax Account
Trusts that do and don't pay Inheritance Tax
Trusts containing ‘relevant property’ pay Inheritance Tax on transfers out of the trust and on the trust’s ten-year anniversary. This guide explains the Inheritance Tax rules for trusts with relevant property and trusts without it.
On this page:
- What is relevant property?
- Assets put into interest in possession trusts before 22 March 2006
- Transitional serial interest trusts and Inheritance Tax
- Immediate post-death interests and Inheritance Tax
- Trusts for bereaved minors and Inheritance Tax
- 18 to 25 trusts and Inheritance Tax
- Trusts for disabled beneficiaries and Inheritance Tax
- Bare trusts and Inheritance Tax
- More useful links
What is relevant property?
Trust property can include money, shares, houses, land or any other assets. Most property held in trusts counts as relevant property. The relevant property contained within the trust is potentially liable for a charge when:
- it is transferred out of a trust (exit charges)
- a ten-year anniversary occurs
The only exceptions to this rule are when property is:
- put into interest in possession trusts before 22 March 2006
- subject to a ‘transitional serial interest’ made before 5 October 2008
- set aside for a disabled person
- set aside for a bereaved minor
- put into an age 18 to 25 trust
How these exceptions apply is looked at in more detail in the sections below.
Assets put into interest in possession trusts before 22 March 2006
From an Inheritance Tax perspective, an ‘interest in possession’ trust is one where a beneficiary has the right to use the property within the trust or receive any income from it. Assets put into an interest in possession trust before 22 March 2006 are not considered to be relevant property, so there is no ten-yearly charge.
During the life of the trust there are no exit charges as long as the asset stays in the trust and remains the ‘interest’ of the beneficiary.
If the trust also contains assets put in on or after 22 March 2006, these assets are treated as relevant property and are potentially liable to the ten-yearly charges.
Transitional serial interest trusts and Inheritance Tax
Before 5 October 2008, beneficiaries of an interest in possession trust could choose to pass on their interest in possession to other beneficiaries, for example their children. This was called making a ‘transitional serial interest’. (There were no Inheritance Tax charges on assets moved into a transitional serial interest trust.)
If a transitional serial interest trust was set up before the October deadline, the new beneficiaries can continue to benefit from the old Inheritance Tax rules for interest in possession trusts. In other words, the assets don’t count as relevant property. This means there is no ten-yearly charge.
Again, as long as the asset stays in the trust and remains the ‘interest’ of the beneficiary there will be no exit charges.
From 5 October 2008 existing beneficiaries of an interest in possession trust can no longer choose to make a transitional serial interest. In this case the assets are regarded as ‘relevant property’ and are potentially liable to the ten-yearly charges.
Immediate post-death interests and Inheritance Tax
If someone acquires an interest in possession from a beneficiary who has died - either through the beneficiary’s will or through the rules of intestacy - the assets don’t count as ‘relevant property’ and the beneficiary will continue to be treated according to the old rules for interest in possession trusts. This means there is no ten-yearly charge.
Exit charges are not a consideration - so long as the asset stays in the trust and remains the ‘interest’ of the beneficiary.
Trusts for bereaved minors and Inheritance Tax
A bereaved minor is a person aged under 18 who has lost at least one parent or step-parent. Where a trust is set up for the benefit of a bereaved minor the assets in the trust are not regarded as relevant property - and so there are no ten-yearly or exit charges - providing that:
- the assets in the trust are set aside for the exclusive benefit of the bereaved minor
- the beneficiary becomes fully entitled to the assets in the trust at the age of 18 at the latest
Find out more about Inheritance Tax on transfers into trust
18 to 25 trusts and Inheritance Tax
The Finance Act 2006 introduced a new category of age ’18 to 25 trusts’. A trust for a bereaved young person can also be set up as an 18 to 25 trust.
As with a trust for a bereaved minor the ten-yearly and Inheritance Tax exit charges don’t apply for an 18 to 25 trust. However, the main differences are:
- the beneficiary must become fully entitled to the assets in the trust by the age of 25
- during the time that the beneficiary is aged between 18 and 25 Inheritance Tax exit charges will apply (the ten-yearly charge doesn’t apply because the trust will only be liable for Inheritance Tax during a seven-year period)
Find out more about Inheritance Tax on assets transferred out of trust
Trusts for disabled beneficiaries and Inheritance Tax
A trust set up for someone with a mental or physical disability is not considered a relevant property trust. This means there is no ten-yearly charge.
Exit charges are not a consideration - so long as the asset stays in the trust and remains the ‘interest’ of the beneficiary.
Transfers of assets into a disabled trust are also exempt from Inheritance Tax if the person making the transfer survives for seven years after making the transfer. (These sorts of transfers are called ‘potentially exempt’ transfers.)
Find out more about Inheritance Tax on transfers into trusts
Bare trusts and Inheritance Tax
A bare trust, also known as a 'simple trust', is one in which each beneficiary has an immediate and absolute right to both capital and income. The beneficiaries of a bare trust have the right to take actual possession of trust property. For Inheritance Tax purposes, the contents of the trust are treated as belonging to the beneficiary so they are not regarded as ‘relevant property’ and there are no ten-yearly charges or exit charges.
Furthermore, transfers into a bare trust may also be exempt from Inheritance Tax, providing the person making the transfer survives for seven years after making the transfer.
Find out more about bare trusts
More useful links
Find out about ‘special trusts’ and Inheritance Tax
Other types of trust and Income Tax and Capital Gains Tax treatment
