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ACCA Strategic Professional · Advanced Taxation (UK)

Inheritance Tax: Transfers to and from Trusts and Property within Trusts

This chapter covers how inheritance tax applies when assets go into a trust, while they sit in it, and when they leave. First classify the trust. Then apply the entry charge, the ten-yearly and exit charges, available reliefs, and the linked CGT and income tax. Always work in the order of events.

What this chapter covers

This chapter tests how IHT treats trusts through their whole life: creation, the time the property is held, and the time it leaves. The first question is always the classification. A relevant property trust, such as a discretionary trust, has its own charging regime. An interest in possession trust that qualifies for older or special treatment is taxed as if the beneficiary owned the underlying assets. A bare trust is ignored and the beneficiary is treated as the owner.

Once you know the type, the rules follow a fixed path. A lifetime transfer into a relevant property trust is a chargeable lifetime transfer. It is taxed at the lifetime rate of 20% on the excess over the nil rate band of £325,000, and extra tax can arise at 40% if the settlor dies within seven years, after taper relief. Inside the trust, a periodic charge arises on each ten-year anniversary and an exit charge arises when property leaves between anniversaries. When an interest in possession ends, the result depends on the type of interest and on what happens next.

This chapter links to the rest of ATX-UK. It builds on lifetime and death IHT for individuals, uses business and agricultural property reliefs, and feeds into CGT planning such as holdover relief and trustee gains. In the exam, trusts often appear in a Section A case study with advice on family wealth planning, so you need technical accuracy and clear written recommendations.

Trusts are a favourite scenario for long written requirements because one set of facts can test classification, IHT at several stages, CGT, income tax and planning advice. The calculations are short once you know the steps, so well-prepared students earn technical marks quickly. The same facts also give room for professional skills marks, because you must explain, compare options and recommend a course of action to a client. Weak classification is expensive. If you pick the wrong regime, every later number in your answer is wrong.

Inheritance tax: transfers to and from trusts and property within trusts: topics in the order to study them

  1. 1Types of Trust and IHT ClassificationEverything else depends on identifying whether the trust is relevant property, a qualifying interest in possession or a bare trust.
  2. 2Lifetime Transfers into TrustsThe entry charge is the first event in a trust's life, and it reuses your lifetime IHT skills: nil rate band, seven-year cumulation and grossing up.
  3. 3Periodic and Exit Charges on Relevant Property TrustsThese charges build on the entry-charge workings and use the lifetime rate and nil rate band in a new way.
  4. 4Interest in Possession Trusts and Transfers from TrustsOnce you know the relevant property rules, the contrasting treatment of interest in possession trusts and the end of an interest is easier to learn.
  5. 5Trust IHT Reliefs and Planning with Business and Agricultural PropertyReliefs reduce the values you have just learned to tax, so they make sense only after the charges.
  6. 6CGT and Income Tax Interaction with TrustsStudy this last to pull the taxes together, since planning advice must weigh IHT against CGT and income tax cost.

How to prepare Inheritance tax: transfers to and from trusts and property within trusts

Prepare this chapter by practising the sequence of events, not by memorising isolated rules. Written exam answers reward a clear structure.

  1. Make a one-page classification chart: relevant property trust, qualifying interest in possession, bare trust. For each, note the IHT treatment at creation, during the trust and at exit.
  2. Practise the entry charge until it is automatic. Example: a £400,000 net gift into a discretionary trust, ignoring exemptions and with the nil rate band unused. If the trustees pay, tax is (£400,000 − £325,000) × 20% = £15,000. If the settlor pays, gross the excess: £75,000 × 100/80 = £93,750, so gross transfer is £418,750 and tax is £18,750.
  3. Add the death-within-seven-years step. Compare 40% death tax with tax already paid, apply taper relief using the table, and remember that no refund is given if tax paid is higher.
  4. Learn the periodic and exit charge method in stages: value the trust, deduct the nil rate band and any reliefs, find the effective rate, then apply the charge rate. Do the exit charge by counting complete quarters since the last anniversary or creation.
  5. Work questions on interest in possession trusts, in particular what happens when an interest ends in life or on death, and whether the result is a PET, a chargeable transfer or inclusion in an estate.
  6. Practise planning questions. Write short advice on using business or agricultural property reliefs, holdover relief and different trust structures, and state the tax cost of each option.
  7. Finish with full past-style case studies. Set a time limit, lay out your workings clearly and include a brief recommendation, because professional skills marks depend on communication and judgement.

Common mistakes in Inheritance tax: transfers to and from trusts and property within trusts

  • Misclassifying the trust

    Fix: Write the classification and one-line reason at the top of your answer before any calculation.

  • Forgetting to gross up when the settlor pays the lifetime tax

    Fix: Check who pays the tax. If it is the settlor, the gift is the net amount and must be grossed up for the tax.

  • Ignoring earlier chargeable transfers in the seven years before the trust

    Fix: List all transfers in the previous seven years first and reduce the available nil rate band accordingly.

  • Applying death tax wrongly on a failed gift into trust

    Fix: Recalculate at 40%, apply taper relief, then deduct the lifetime tax paid. State clearly if no extra tax is due.

  • Treating all trust charges as if they work the same way

    Fix: Keep a separate method for each charge and label every working with the event it relates to.

  • Giving IHT advice without CGT and income tax effects

    Fix: For every planning point, add a short note on CGT, holdover relief and trust income tax, then give a recommendation.

Last-day revision: Inheritance tax: transfers to and from trusts and property within trusts

  • Classify first: relevant property, interest in possession or bare trust.
  • A bare trust is ignored for IHT; the beneficiary is treated as the owner.
  • A lifetime transfer into a relevant property trust is a chargeable lifetime transfer.
  • Lifetime IHT is 20% on the excess over the £325,000 nil rate band; the death rate is 40%.
  • If the settlor pays the lifetime tax, gross up the net amount: the excess is multiplied by 100/80.
  • Seven-year cumulation looks back seven years before each chargeable transfer.
  • On death within seven years, tax is 40% less taper relief, minus lifetime tax paid, and never below nil.
  • Taper relief starts only after three years: 20% for more than 3 and under 4 years, up to 80% for more than 6 and under 7.
  • Periodic charge arises every ten years; exit charge arises when property leaves the relevant property trust.
  • Reliefs such as business and agricultural relief can reduce the value charged inside the trust, if conditions are met.
  • Gifts into trust are disposals for CGT at market value; check holdover relief.
  • Trustees pay CGT at the higher rate of 24% and have a smaller annual exempt amount than an individual.

Inheritance tax: transfers to and from trusts and property within trusts practice questions

Inheritance tax: transfers to and from trusts and property within trusts in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Inheritance tax: transfers to and from trusts and property within trusts: frequently asked questions

What is a relevant property trust for IHT?

It is a trust within the special charging regime, which includes discretionary trusts. It is subject to a lifetime entry charge, ten-yearly charges and exit charges. You must identify it before you can apply any of these.

How is a transfer into a trust taxed for IHT?

A transfer into a relevant property trust is a chargeable lifetime transfer. After exemptions, the excess over the available nil rate band is taxed at 20%. If the settlor then dies within seven years, extra tax may arise up to the 40% death rate, after taper relief and a credit for tax already paid.

Do I need to calculate periodic and exit charges in the exam?

You should be ready to. The rates work from the lifetime rate and the nil rate band, and exit charges depend on how long the property was in the trust. Practise the steps until you can lay them out clearly in a short answer.

How do CGT and income tax link to this chapter?

Putting assets into a trust is a CGT disposal, and holdover relief may defer the gain. The trustees then face their own CGT and income tax. A good planning answer compares all three taxes before recommending a course of action.