Discretionary Trusts and Inheritance Tax: The 10-Year Periodic Charge Explained

Tax Queen

Tax Expert @ Pie

8 min read

This guide explains the inheritance tax charges that apply to discretionary trusts in the UK, focusing on the 10 year periodic charge under the relevant property regime. It covers who pays, when the charge arises, how the rate of up to 6% is calculated, what affects the taxable value, and how exit charges interact with the anniversary cycle. It also sets out the IHT100d reporting duties, the 6 month filing and payment deadline, and the changes taking effect from April 2026 and April 2027 affecting trusts, business and agricultural property, and pensions. It is written for trustees, settlors and beneficiaries of UK discretionary trusts.

The Charge Nobody Diarises

Most people who set up a discretionary trust remember the entry charge. Very few remember the anniversary.

A trust created on 14 March 2016 had its first ten-year anniversary on 14 March 2026. The account and the payment are both due within 6 months after the end of the month in which the chargeable event occurred, which for that trust means 30 September 2026. Nothing arrives in the post to remind the trustees, and the liability sits with them personally.

Trusts set up in the mid 2010s are now reaching that first anniversary in large numbers, and asset values have risen considerably since. A trust funded comfortably inside the nil rate band at the outset may be well above it now.

Where the Periodic Charge Fits

Discretionary trusts sit inside what HMRC calls the relevant property regime. It charges inheritance tax at three separate points rather than once on death.

On the way in. A chargeable lifetime transfer into the trust above the settlor's available nil rate band attracts an immediate charge of 20%, with a further charge if the settlor dies within 7 years.

Every ten years. The periodic charge, capped at 6% of the value above the available nil rate band.

On the way out. An exit charge when capital leaves the trust, proportionate to the last periodic charge.

The trade off is deliberate. Relevant property has its own charging regime rather than being taxed at 40% as part of an individual's estate on death, and in exchange it faces smaller charges at regular intervals during the life of the trust. For the general position on death estates, see inheritance tax and how much inheritance tax you pay on £1 million.

Self-employed woman reviewing three inheritance tax charge points for a UK trust.

Why the Maximum is 6% and Not 40%

The 6% figure is not arbitrary. It is 30% of the lifetime rate of 20%, and 20% is itself half the death rate of 40%.

So the theoretical worst case is 6% of the value above the nil rate band, once a decade. On a trust worth £1,000,000 with a full £325,000 nil rate band available, the maximum exposure is 6% of £675,000, or £40,500. Averaged out, that is roughly £4,050 a year.

Compare that with 40% on the same value in a taxable estate and the logic of the regime becomes clear. The periodic charge feels unwelcome because it arrives as a bill during the settlor's lifetime, but the arithmetic is usually favourable.

That shortcut only holds while the trust has no history. The charge uses the current value of the relevant property, but the figures feeding the rate are historic. Related settlements, the settlor's earlier chargeable transfers, property added part way through the decade and earlier exit charges will all move the answer away from the simple calculation, and the worked examples below assume none of them apply.

Treat 6% as a ceiling rather than a standard rate. Most trusts pay considerably less, and trusts at or below the available nil rate band pay nothing at all.

How the Calculation Actually Runs

The mechanics are fiddly, so here is the sequence trustees follow.

Step one. Value all relevant property in the trust immediately before the anniversary. Use open market value, and get a professional valuation for property or unquoted shares rather than an estimate.

Step two. Deduct available reliefs and exemptions, including Business Property Relief and Agricultural Property Relief where the assets qualify, and any liabilities the trust owes.

Step three. Establish the available nil rate band. Start with £325,000, then reduce it by the settlor's chargeable lifetime transfers in the 7 years before the trust was created, and by the amounts on which exit charges were imposed in the 10 years before the anniversary. Related settlements created on the same day by the same settlor also reduce it.

Step four. If the net value sits at or below the available nil rate band, there is no charge. If it exceeds it, tax the excess at 20%.

Step five. Divide that tax figure by the value of the trust to get the effective rate, then take 30% of the effective rate. That gives the actual rate, which is applied to the chargeable value.

Here it is with numbers. A trust holds £800,000 of relevant property at its anniversary, the settlor made no chargeable transfers in the preceding 7 years and no capital has left the trust, so the full £325,000 is available. The excess is £475,000, and tax at 20% gives £95,000. Dividing £95,000 by £800,000 produces an effective rate of 11.875%, and 30% of that gives an actual rate of 3.5625%. Applied to £800,000, the tax due is £28,500, well under the headline 6%.

There is one further adjustment. Where relevant property has been in the trust for less than the full 10 years, the rate applying to that property is reduced. The decade is divided into 40 complete quarters, and the reduction reflects the number of quarters for which the property was not relevant property. Property that has been relevant property for only 20 of the 40 quarters carries a correspondingly lower rate.

House, keys and contract symbolising relevant-property inheritance tax charge points.

Exit Charges and How They Interact

Capital leaving the trust between anniversaries triggers an exit charge.

In the first 10 years, the rate is based on the effective rate calculated under the rules for the hypothetical lifetime transfer. After the first anniversary, the rate is derived from the rate applying at that anniversary and reduced according to the number of complete quarters elapsed since.

So a distribution made 5 years after an anniversary uses a fraction of the previous rate based on 20 of the 40 quarters. Trustees planning a large distribution therefore have a genuine timing question, though the trust deed and the beneficiaries' needs should drive the decision rather than the tax.

Distributions within the first 3 months after the trust is created, or within the first 3 months following a 10 year anniversary, generally carry no exit charge. The statutory conditions are specific, so check them rather than treating the window as automatically free of tax.

One change to watch from 6 April 2026. The rate for exit charges is now worked out on unrelieved values, so Business Property Relief and Agricultural Property Relief no longer reduce the rate when capital leaves. Note the separate transitional rule sitting alongside it, because qualifying property settled before 30 October 2024 keeps unlimited 100% relief on its own exit until the trust reaches its next anniversary falling on or after 6 April 2026. The two rules work on different parts of the calculation, one on the rate and one on the relief given to the property leaving.

Reporting and Payment

Trustees report on form IHT100d, the event form for the principal charge on a relevant property trust.

The old combined IHT100 account and its IHT100WS worksheet were withdrawn in August 2024 and replaced by a suite of event specific forms, each carrying its own calculation. An exit charge goes on IHT100c, a gift into trust on IHT100a. The supplementary D schedules still attach to whichever form applies, such as D36 for land and buildings or D38 for business relief. Picking the wrong form means filing the wrong account and starting again.

Filing and payment both fall due 6 months from the end of the month in which the anniversary falls, and interest runs from that date. Apply for an inheritance tax reference on form IHT122 well before that date, because you cannot pay without one.

There is a reporting exception. Where the trust qualifies as an excepted settlement, no return is needed. The headline test is that the notional chargeable transfer does not exceed 80% of the nil rate band, but the trustees must also have been UK resident throughout and there must be no related settlements. Do not assume this applies without checking, because the 80% test uses the gross value before any reliefs and before deductible liabilities.

One further point of detail. Since 6 April 2025 the regime turns on long term UK residence rather than domicile, and the forms now ask about residence directly.

Trustees are personally liable for the tax. Where the trust is asset rich and cash poor, and the asset is a single property, that liability can create a genuine funding problem. Selling to meet it brings capital gains tax into play at 24% with a trustee annual exempt amount of only £1,500, so see what is a capital gain and the capital gains allowance before disposing of anything.

Registration is a separate duty. Almost all express trusts must be on HMRC's Trust Registration Service, with changes reported within 90 days.

Trustee reviewing and completing an inheritance tax account ahead of the trust’s ten-year anniversary, with deadlines highlighted.

What Changed and What is Coming

Three developments matter for anyone facing an anniversary in the next few years.

From 6 April 2026, Business Property Relief and Agricultural Property Relief are capped. 100% relief is limited to the first £2.5 million of qualifying property, with 50% relief above that, which works out at an effective 20% on the excess. The allowance began life at £1 million when the cap was announced in October 2024, was raised to £2.5 million on 23 December 2025 and became law in Finance Act 2026, which received Royal Assent on 18 March 2026. It is frozen at that level until April 2031 and index linked afterwards. For individuals, any unused allowance passes to a surviving spouse or civil partner, so a couple can cover £5 million between them.

Trusts get their own version of the allowance, and the rules on who qualifies are easy to misread. A trust that already held qualifying business or agricultural property immediately before 30 October 2024 has its own £2.5 million allowance. Trusts created by the same settlor on or after that date share a single allowance between them, allocated in date order. A trust set up before 30 October 2024 that held no qualifying property at that point does not acquire an allowance simply by being old.

Timing matters as much as the amount. Property settled before 30 October 2024 comes into the new regime at the trust's first 10 year anniversary falling on or after 6 April 2026, and unlimited 100% relief continues to apply on exit charges until then. At that first anniversary under the new rules, relief is apportioned across the decade, running unlimited for the part of the period falling before 6 April 2026 and capped for the part after it. A trust whose anniversary fell in March 2026 is untouched this time round and meets the cap in 2036.

There is also a change that catches investors rather than farmers. Shares listed on AIM and similar markets now attract 50% relief only, and they do not use up the £2.5 million allowance. Genuinely unquoted trading company shares still qualify for 100% relief within it.

The pensions change is legislated in the same Act, so it is settled rather than proposed. For deaths on or after 6 April 2027, most unused pension funds and death benefits count towards the value of the estate for inheritance tax. Where the member dies before that date, the old rules still apply even if the benefits are paid out afterwards. Death in service benefits from a registered scheme are excluded, as are charity lump sums. Personal representatives carry the reporting and payment duty, with beneficiaries jointly and severally liable for the tax on what they receive. Our coverage of the end of the pension inheritance tax exemption explains the shift.

The nil rate band itself stays frozen at £325,000, with the residence nil rate band at £175,000, until April 2031. Frozen thresholds plus rising asset values mean more trusts crossing into charge each year, a pattern already visible in HMRC hitting more families with higher inheritance tax and in HMRC inheritance tax recoveries

A Practical Checklist for Trustees

Find the trust's creation date and calculate every anniversary from it, then diarise one deadline, being 6 months from the end of the month the anniversary falls in, by which point both the account and the payment are due.

Value the assets properly rather than optimistically, because HMRC challenges soft valuations on unquoted shares and property more often than on anything else.

Check the settlor's transfer history in the 7 years before the trust started, since that history reduces the nil rate band and is easily overlooked a decade later.

Track every capital distribution across the decade, because amounts charged on exit in the preceding 10 years reduce the nil rate band available at the next anniversary.

Establish whether the trust actually holds a £2.5 million relief allowance and review any business, farming or AIM holdings against the new caps before the next anniversary rather than after it.

And keep the trust's income position clean alongside the capital position, since the 45% trust rate and the £500 de minimis cliff edge apply every year regardless of where you sit in the 10 year cycle. From 6 April 2027 the rate on savings and property income inside trusts rises to 47%, so a trust holding let property or interest bearing deposits gets more expensive to run from that date.

Person reviewing trustee responsibilities using a notebook and laptop checklist.

Where Pie Fits

Pie does not file the trust's own return, which is a specialist job on form SA900 alongside the IHT100d.

Where it helps is the other side of the arrangement. Beneficiaries receiving distributions get an R185 carrying a tax credit at 45%, and where their own rate is lower, the difference is reclaimable. Pie brings that trust income together with everything else on your personal return so the credit is claimed rather than quietly left behind, and our guides to Self Assessment and claiming a tax refund walk through it.

See how it works, find out why Pie suits people with income from several sources, if you receive trust income and have never checked whether a repayment is due.

For the anniversary itself, take advice. The calculation is one of the few areas of UK tax where a small error in the nil rate band history changes the answer entirely.

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