Property Held in Trust: CGT, IHT and Tax Rules for 2026/27

Why Property and Trusts Are a Complex Combination

Trusts are powerful estate planning tools but they carry a distinct and often punishing tax regime. When property is involved -- whether residential, commercial, or investment -- the interaction of inheritance tax (IHT), capital gains tax (CGT), and income tax creates a web of obligations that requires careful management.

This guide explains the two most common trust types used for property -- discretionary trusts and bare trusts -- and sets out the tax consequences of creating, holding, and distributing property through each.

Bare Trusts: The Simple End of the Spectrum

A bare trust (also called an absolute trust or simple trust) is one where the beneficiary has an immediate, indefeasible right to both the capital and income of the trust. The trustee holds legal title, but the beneficiary is the beneficial owner for all practical and tax purposes.

CGT in a Bare Trust

Because the beneficiary is treated as owning the asset, CGT on any disposal is assessed on the beneficiary using their personal rates and allowances:

• Annual CGT exempt amount: 3,000 pounds (individual, 2026/27)
• Residential property gain: 18% (basic rate taxpayer) or 24% (higher/additional rate)
• Other assets: 10% (basic rate) or 20% (higher/additional rate)

If the beneficiary is a child, gains are assessed on them -- but income generated by trust assets is taxed on the settlor (the person who created the trust) if the child is a minor and the settlor is a parent.

IHT and Bare Trusts

Bare trusts are treated as transparent for IHT. The assets are included in the beneficiary's estate rather than being subject to the relevant property regime (the regime that applies to discretionary trusts). This means:

• No 10-year periodic charge
• No exit charges
• The assets form part of the beneficiary's taxable estate on death

This simplicity makes bare trusts attractive for passing assets to adult children or grandchildren, but they offer less flexibility -- once established, the beneficiary's entitlement cannot be varied.

Discretionary Trusts: Flexibility at a Tax Cost

A discretionary trust gives the trustees power to decide how income and capital are distributed among a class of beneficiaries. This flexibility is valuable for family planning -- particularly where circumstances may change -- but it comes with a significantly heavier tax burden.

Creating a Discretionary Trust: The Entry Charge

When you transfer property into a discretionary trust, this is a chargeable lifetime transfer (CLT) for IHT purposes. The transfer is immediately chargeable at 20% (half the death rate) on the value above your available nil rate band of 325,000 pounds.

Example: You transfer a rental property worth 500,000 pounds (having used no previous CLTs). The excess above the nil rate band is 175,000 pounds. IHT at 20% = 35,000 pounds, payable within six months.

If the transfer value exceeds 325,000 pounds and you have made previous CLTs within the previous seven years, those will reduce your available nil rate band further.

There is also a CGT disposal when property is transferred into a discretionary trust, since the transfer is treated as a disposal at market value. However, holdover relief (under section 260 TCGA 1992) is available, allowing the gain to be deferred until the trustees later dispose of the property.

The 10-Year Periodic Charge

Every 10 years after the trust is created, a periodic charge applies. The maximum rate is 6% of the trust value above the nil rate band.

The calculation is more nuanced in practice:

1. Take the trust value at the 10-year anniversary date
2. Add back any distributions made in the previous 10 years
3. Deduct the available nil rate band (325,000 pounds minus any CLTs made by the settlor in the seven years before the trust was created)
4. Apply the effective rate (maximum 6%, but often lower depending on the proportion of the trust's life during which assets were held)

Example: A discretionary trust holds a property worth 600,000 pounds at the 10-year anniversary. The nil rate band is 325,000 pounds, and the settlor made no other CLTs. Relevant value = 275,000 pounds. Maximum periodic charge = 275,000 x 6% = 16,500 pounds.

The effective rate is normally lower than 6% because the calculation accounts for how much of the previous decade the assets were actually subject to the relevant property regime.

Exit Charges

When assets leave a discretionary trust -- whether by distribution to a beneficiary or by appointment of an asset -- an exit charge applies. This is calculated as a proportion of the 10-year periodic charge rate, based on how many complete quarters have elapsed since the last 10-year anniversary.

Exit charges arise:

• When capital is distributed to a beneficiary
• When property is appointed out to a beneficiary absolutely
• When the trust is wound up

The exit charge rate is at most 6% but is usually a fraction of that -- particularly soon after a 10-year anniversary when the charge has just been settled.

CGT in a Discretionary Trust

Trustees of discretionary trusts pay CGT at the higher/additional rate regardless of their income:

• Residential property: 24%
• Other assets: 20%

The annual CGT exempt amount available to trustees is 1,500 pounds in 2026/27 (reduced from the individual limit of 3,000 pounds, and halved again where the same settlor has created multiple trusts).

Where a beneficiary occupies the property as their main residence, it may be possible for the trust to claim principal private residence (PPR) relief on the trustees' gain. However, the rules are strict: the beneficiary must have an absolute entitlement to occupy the property or must be entitled to do so under the trust deed, and the election must be made correctly.

Holdover Relief on Transfer Out

When property is appointed out of a discretionary trust to a beneficiary, the trustees can hold over the gain (under section 260 TCGA 1992) so that the beneficiary takes the property at the trustees' base cost. This is beneficial where the trust has a substantial unrealised gain and the beneficiary is a lower-rate taxpayer who intends to hold the property long-term.

Holdover relief is not available if the property being appointed out is also receiving PPR relief at the same date.

Income Tax on Trust Property

If the trust holds a rental property, income tax applies to the rental profit:

• Bare trust: income is assessed on the beneficiary at their marginal rate
• Discretionary trust: trustees pay income tax at 45% (the trust rate) on income above a de minimis of 500 pounds per year. Income distributed to beneficiaries carries a 45% tax credit, which basic or higher rate beneficiaries can reclaim.

This 45% rate makes it important to consider whether income should be distributed to beneficiaries promptly, as the reclaim process can recover significant amounts for lower-rate taxpayers.

Appointing Property Out of Trust

Where trustees wish to appoint property out to a beneficiary (effectively ending the trust in relation to that asset), the main tax events are:

1. CGT: A disposal occurs at market value. Holdover relief under s260 is available.
2. IHT exit charge: Calculated as above.
3. SDLT: Importantly, no SDLT arises when property is appointed out of a trust to a beneficiary, provided the appointment is not for consideration. This is a significant advantage compared to a straightforward sale and repurchase.

Planning Considerations

Holding property in trust can be beneficial in certain circumstances:

• Protecting assets for children or grandchildren while retaining some control over timing of distributions
• Reducing the taxable estate where the immediate IHT charge is manageable
• Equalising income between beneficiaries who are lower-rate taxpayers, reducing the effective income tax burden

However, the ongoing costs -- accountancy, trustee administration, periodic IHT charges -- must be weighed against the benefits. For many families, a straightforward gifting strategy or a will trust (which arises on death rather than during lifetime) may achieve similar objectives with less complexity.

Summary

Property held in trust carries a layered tax burden that differs materially depending on the trust type. Bare trusts are tax-transparent and relatively straightforward. Discretionary trusts offer flexibility but impose entry charges, 10-year periodic charges, exit charges, and higher CGT rates. Professional advice from a specialist trust lawyer and tax adviser is essential before establishing or varying any trust holding property.