What is the 10-year charge on a discretionary trust and how is it calculated?

Full answer

Discretionary trusts (a 'relevant property' trust) are subject to their own IHT regime separate from the settlor's estate. Instead of a single 40% charge on death, the trust faces a 'periodic' or 'principal' charge on each 10-year anniversary of its creation, plus 'exit' charges when capital leaves the trust between anniversaries. The 10-year charge is capped at 6%. This is because trust charges run at half the lifetime rate (20% / 2 = 10% notional), and the rate is then scaled by the proportion of value above the nil-rate band, producing an effective maximum of 6% of the chargeable amount. Each trust has its own nil-rate band of GBP 325,000, reduced by any chargeable lifetime transfers the settlor made in the seven years before creating the trust. Worked example: a trust holds GBP 525,000 at its 10-year anniversary with a full GBP 325,000 band available. The excess is GBP 200,000. At the effective 6% rate the charge is roughly GBP 12,000, though the actual computation uses an 'effective rate' derived from a notional lifetime transfer, so the figure is usually lower than the headline 6%. Who it affects: anyone who has settled assets - property, investments or cash - into a discretionary trust for family or beneficiaries. Bare trusts and most disabled-person trusts fall outside this regime. 2026/27 detail: the nil-rate band remains frozen at GBP 325,000 (frozen to April 2028), so as asset values rise more trusts will exceed it and face charges. The actual rate depends on the trust's history, prior distributions and the settlor's gifting record, so the calculation is genuinely complex. Use an inheritance tax calculator to estimate the estate position and seek specialist trust advice before each anniversary.

Try the calculator