Inheritance Tax on Trusts: How Trusts Are Taxed

Q: What is the 6% charge on trusts?

The 6% figure is the maximum rate of the principal, or ten-year, charge on the relevant property in most discretionary trusts, applied at each ten-year anniversary of the trust (gov.uk, as at July 2026, subject to change). A similar exit charge of up to 6% can apply when assets leave the trust. The actual rate is often lower, depending on the trust's value and history.

Do you pay inheritance tax on trusts?

Often, yes, but usually not at the 40% estate rate. Most trusts fall under the "relevant property" regime, where inheritance tax can arise at three points: when assets are transferred in, at each ten-year anniversary, and when assets are paid out. The standard estate rate is 40%, or a reduced 36% where at least 10% of the net estate passes to charity (gov.uk, as at July 2026, subject to change).

What is "relevant property"?

Relevant property is, broadly, the assets held in most trusts, such as money, shares, land or a home, once they are inside the trust. For most types of trust, inheritance tax becomes due when transfers into the trust total more than the £325,000 inheritance tax threshold, known as the nil-rate band (gov.uk, as at July 2026, subject to change). Some trusts, such as most bare trusts and certain disabled persons' trusts, sit outside this regime.

The three inheritance tax charges on a trust

For a trust within the relevant property regime, inheritance tax can arise at three separate points. The rates are lower than the 40% estate rate, but they can recur over the life of the trust, which is why the timing matters as much as the headline percentage.

Charge	When it can apply	Rate (July 2026)
Entry charge	On transfers into the trust above the nil-rate band	20% (lifetime, if trustees pay)
Ten-year (principal) charge	At each ten-year anniversary of the trust	Up to 6%
Exit (proportionate) charge	When assets leave the trust	Up to 6%

Charge

When it can apply

Rate (July 2026)

Entry charge

On transfers into the trust above the nil-rate band

20% (lifetime, if trustees pay)

Ten-year (principal) charge

At each ten-year anniversary of the trust

Up to 6%

Exit (proportionate) charge

When assets leave the trust

Up to 6%

Source: gov.uk/trusts-taxes and gov.uk guidance, as at July 2026, subject to change. The nil-rate band is £325,000 (gov.uk) and is frozen until the end of the 2030-31 tax year (5 April 2031) (gov.uk).

How inheritance tax differs by trust type

The charges above apply to most discretionary trusts, but not to every trust. How a trust is taxed for inheritance tax depends on the class of trust, so two arrangements that look similar can be treated very differently. The table below sets out the broad position for the most common types. For a fuller explanation of how each works, see our Trusts Explained guide.

Trust type	Broad inheritance tax treatment
Discretionary trust	Relevant property regime: possible entry, ten-year and exit charges
Bare trust	Assets usually treated as the beneficiary's own, so counted in their estate on death
Interest in possession trust	Depends on when it was set up; the interest can form part of a beneficiary's estate
Disabled person's trust	Can qualify for special treatment, often outside the ten-year and exit charges

Trust type

Broad inheritance tax treatment

Discretionary trust

Relevant property regime: possible entry, ten-year and exit charges

Bare trust

Assets usually treated as the beneficiary's own, so counted in their estate on death

Interest in possession trust

Depends on when it was set up; the interest can form part of a beneficiary's estate

Disabled person's trust

Can qualify for special treatment, often outside the ten-year and exit charges

Broad summary based on gov.uk/trusts-taxes, as at July 2026, subject to change. The detailed rules, especially for interest in possession trusts set up before and after 22 March 2006, are complex.

Because the same asset can be taxed very differently depending on the wrapper around it, the choice of trust is usually made alongside the tax position rather than after it. One option some people consider is a discretionary trust, which gives trustees flexibility over who benefits and when, though it sits squarely within the relevant property charges described above.

A worked example (illustration only). Suppose a settlor transfers £500,000 into a new discretionary trust and has made no other recent gifts. The first £325,000 falls within the nil-rate band, leaving £175,000 above it. If the trustees pay the lifetime entry charge at 20%, that would be around £35,000 on the excess (gov.uk, July 2026, subject to change). At each ten-year anniversary a further charge of up to 6% can apply to the relevant property, and an exit charge of up to 6% can apply when funds are paid out. Every trust is different, reliefs and prior gifts change the figures, and this is general information rather than a calculation for any particular trust.

What happens on the settlor's death

A trust does not automatically avoid inheritance tax on the person who created it. If a settlor dies within seven years of putting assets into a trust, the value transferred can still be brought into their estate, reducing the nil-rate band available elsewhere (gov.uk, gifts and the 7-year rule, as at July 2026, subject to change). Where a settlor keeps a benefit from the trust, such as continuing to live in a home placed into it rent free, anti-avoidance rules can treat the asset as still theirs for inheritance tax. This is one reason trust planning is generally discussed with a qualified professional before anything is signed.

A trust changes how and when inheritance tax is charged. It does not simply switch the tax off.

Trusts and inheritance tax in Scotland and Northern Ireland

Inheritance tax is a UK-wide tax, so the trust charges described here apply across England and Wales, Scotland and Northern Ireland in broadly the same way. What differs is the surrounding law. Scotland has its own trust and succession law, including legal rights that can give a spouse and children a fixed share of an estate, which can affect how a trust is structured. Northern Ireland follows a system close to England and Wales. Where a trust or its assets touch more than one jurisdiction, it can be worth taking advice in each. For the wider picture, see our Inheritance Tax Explained guide and our estate planning guide.

Frequently asked questions

Do you pay inheritance tax on money in a trust?

Often, but usually not at the 40% estate rate. Most trusts fall under the relevant property regime, where inheritance tax can arise on transfers in above the £325,000 nil-rate band, at each ten-year anniversary at up to 6%, and on exit (gov.uk, as at July 2026, subject to change). Bare trusts are generally treated differently.

What is the 6% charge on trusts?

The 6% figure is the maximum rate of the principal, or "ten-year", charge on the relevant property in most discretionary trusts, applied at each ten-year anniversary of the trust (gov.uk, as at July 2026, subject to change). A similar exit charge of up to 6% can apply when assets leave the trust. The actual rate is often lower, depending on the trust's value and history.

Can a trust avoid inheritance tax completely?

Not as a rule. A trust changes how and when inheritance tax is charged rather than removing it altogether, and gifts into trust can still count in the settlor's estate if they die within seven years (gov.uk, as at July 2026, subject to change). Because outcomes vary widely, this is generally discussed with a qualified professional first.

How much can I put into a trust before inheritance tax applies?

For most trusts, an entry charge can apply once transfers into the trust exceed the £325,000 nil-rate band, taking into account other chargeable gifts in the previous seven years (gov.uk, as at July 2026, subject to change). Where trustees pay the lifetime charge, it is 20% on the amount above that threshold. The precise position depends on your gift history.

Are bare trusts subject to inheritance tax charges?

Bare trusts are generally treated differently from discretionary trusts. The assets are usually regarded as belonging to the beneficiary, so they normally fall outside the ten-year and exit charges but count in the beneficiary's own estate when they die (gov.uk, as at July 2026, subject to change). The treatment can differ where the beneficiary is a child.

Do trustees have to report and pay the trust's inheritance tax?

Where a charge arises, trustees are generally responsible for reporting it to HMRC and paying any inheritance tax due, typically within six months of a ten-year anniversary or an exit (gov.uk, as at July 2026, subject to change). Many trustees take professional help with the calculations, which can be involved, especially where reliefs or earlier gifts are relevant.

About Fairchild Oldfield

The Fairchild Oldfield team brings together estate planning, tax, independent financial advice and client care, working with families across England and Wales.

Fairchild Oldfield are estate planning specialists and will writers, not a firm of solicitors. This article is general information based on practical experience, not legal, tax or financial advice.

Important: This article is general information only and is not legal, tax or financial advice. Reading it does not create a professional relationship. It is based on the law of England and Wales, and other UK jurisdictions may differ. Figures and rules are current as at July 2026 and are subject to change. Before acting, many people choose to seek advice from a suitably qualified professional, such as a solicitor, a STEP practitioner, an accountant, or an FCA-authorised financial adviser, who can consider your individual circumstances.