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HMRC Trusts and Inheritance Tax

Inheritance Tax is levied by HM Revenue and Customs on the value of the estate left behind when someone dies (e.g. possessions, property, money).

But, the rules for trusts and Inheritance Tax mean it can also apply after the transfer of some of your estate into a trust - even while you are alive.

Circumstances When Inheritance Tax is Due

You can expect to pay UK Inheritance Tax in situations when (any):

  • An asset ‘transfers into trust’ (e.g. buildings, land).
  • Exit charges become due (e.g. after transferring assets out of a trust) or the trust comes to an end.
  • The 10 year anniversary charge applies to the trust.
  • When someone has passed away and the management of their estate involves dealing with trusts.

Note: You would pay 40% on anything that goes above the current Inheritance Tax threshold. The reduced rate of 36% applies if the ‘will’ donates anything over 10% of the estate to a charitable organisation.

Paying Inheritance Tax on ‘Relevant Property’

HMRC classifies most assets held in trusts (e.g. houses, land, money) as ‘relevant property’. In most cases, you will need to pay Inheritance Tax on these items (not assets classed as ‘excluded property’).

Trusts and Inheritance Tax: Special Rules

There are several different types of trusts in the United Kingdom, and they do not receive the same treatment for Inheritance Tax purposes.

Bare Trusts

Even though the assets held in a bare trust will be set up in the name of a trustee, they will go ‘directly’ to the beneficiary (usually when they reach 18 years old). At this time, the beneficiary gets the right to the assets and any income generated from the trust.

In some cases, transfers made into bare trusts may also be Inheritance Tax exempt. To qualify, the person who makes the transfer must survive for a minimum of seven (7) years afterwards.

Note: The index section has extra information about trusts and taxes in Great Britain (England, Scotland, Wales) and Northern Ireland.

‘Interest in Possession’ Trusts

In simple terms, having ‘interest in possession’ means the beneficiary has entitlement to the income. There is no Inheritance Tax to pay on any assets transferred into these kinds of trusts before the 22nd of March in 2006. The 10 year anniversary charge applies to assets transferred since.

As long as the assets stay in the trust (remaining as the ‘interest’ of the beneficiary), there is no Inheritance Tax to pay during the life of the trust.

22nd of March 2006 to 5th of October 2008:
  • Beneficiaries of ‘interest in possession trusts‘ were allowed to make a ‘transitional serial interest’ (e.g. pass on their interest to their children or other beneficiaries).
  • Inheritance Tax (IHT) would not be due in situations such as these.
Since 5th of October 2008:
  • Beneficiaries of ‘interest in possession trusts’ have not been allowed to make transitional serial interests for this purpose.
  • Thus, transferring the ‘interest’ from the 5th of October 2008 means it may incur a charge of 20% as well as the 10-yearly Inheritance Tax charge (excluding disabled trusts).

Important: Inheritance Tax paid at a 10-year anniversary would not be due if you inherit this kind of trust from someone who died. But, the 40% tax rate would apply when you die.

If it is a ‘Will Trust’

Asking to have some (or all) of the assets put into a trust is better known as setting up a ‘will trust’. In this case, the deceased person’s personal representative must ensure the trust gets set up properly and all taxes get paid. The trustee(s) would need to ensure that any Inheritance Tax gets paid – due from any later charges.

Transferring Assets into a Trust before Death

What happens if a deceased person transferred their assets into a trust before they died? In this case, you must determine whether they transferred them in the seven (7) years before they died.

If so, they may have paid the 20% Inheritance Tax rate. Hence, you would also need to pay the extra 20% from their estate.

Note: There may not have been Inheritance Tax due on the transfer. But, you would still need to add its value to the estate of the deceased person when working out the value for Inheritance Tax purposes.

Trusts Set Up for Bereaved Minors

The definition of a bereaved minor is a child (under the age of 18) who has lost one (1) or both parents (or step-parents). There are no Inheritance Tax charges for trusts set up for a bereaved minor, providing:

  • Assets held in the trust have been set aside ‘only’ for the bereaved minor.
  • They gained full entitlement to the assets by the age of eighteen (18).

You can also set up a trust for a bereaved young person (e.g. between the ages of 18 and 25). In this case, even though the 10 year anniversary charges would not apply, the key differences are:

  • Beneficiaries need to become fully entitled to assets held in the trust by the age of twenty five (25).
  • Inheritance Tax exit charges may be due during the time that the beneficiary is aged between eighteen (18) and twenty five (25).
Trusts Set Up for Disabled Beneficiaries

As long as the assets stay inside the trust, and remain as the ‘interest’ of the beneficiary, the 10-yearly charge or exit charge do not apply on this type of trust.

Inheritance Tax would not be due on the transfer of assets into this kind of trust providing the person who makes the transfer survives for a minimum of seven (7) years after making it.

Paying Inheritance Tax (IHT)

You must use (form IHT100) to pay your Inheritance Tax bill for a trust. You may also need to value other assets to check if Inheritance Tax is due.

Related Help Guides

Note: The GOV.UK website contains detailed HMRC guidance on Trusts and Inheritance Tax, including the rules for transferring assets into or out of a trust.

Trusts and Inheritance Tax Help Guide for United Kingdom