Advanced Taxation (UK) · Inheritance tax: transfers to and from trusts and property within trusts

Lifetime Transfers into Trusts: IHT on Chargeable Lifetime Transfers

Updated 11 October 2026 · Fact-checked

A transfer into a discretionary trust is a chargeable lifetime transfer (CLT). You compute the value lost, deduct exemptions, then tax the excess over the available nil rate band at 20% (grossed up if the donor pays). If the donor dies within seven years, the CLT is retaxed at 40%, with taper relief after three years.

Understand Lifetime Transfers into Trusts

When you put assets into a discretionary trust, inheritance tax (IHT) can arise at once. This is because the gift is a chargeable lifetime transfer (CLT), not a potentially exempt transfer (PET). A PET only applies to gifts to individuals and some trusts. A CLT is taxed on the day it is made, if it exceeds the available nil rate band.

Start with the loss to the donor's estate. This is the value of the estate before the gift less the value after it. It can differ from the value of the asset given away, for example with related property or where the donor pays the tax. Then deduct exemptions: the annual exemption and any business or agricultural property relief. Reliefs come off first, then the annual exemptions.

Next, look back seven years from the date of the CLT. Add up earlier CLTs in that window. This is the cumulative total. PETs made in that window also count if they have become chargeable because the donor died. In the exam, the nil rate band available is £325,000 less that cumulative total. Only the excess is taxed.

The lifetime rate is 20%. If the trustees pay the tax, it is 20% of the excess. If the donor pays, the tax is itself a further loss to the estate, so you gross up. The gross transfer is the net transfer plus the tax, and the tax is the excess × 20/80, or 25% of the net excess. Check which person pays before you start.

If the donor dies within seven years of the CLT, the transfer is taxed again using the death rate of 40%. The nil rate band is applied to the CLT at the date of the gift, using the cumulative total of the seven years before that gift. Tax at 40% is reduced by taper relief if the death is more than three years after the gift. You then deduct lifetime tax already paid. The extra tax cannot be negative. Taper relief reduces the tax, not the value of the transfer, and the nil rate band is not tapered.

Key rules to remember

Value of a transfer: Loss to donor's estate = value before − value after; Use this, not just the asset's value, if the donor pays the tax or related property applies.
Chargeable amount: Transfer of value − annual exemptions (current and prior year if unused) − reliefs; Relief such as business property relief comes off first, then annual exemptions. The annual exemption is £3,000. It is not given in the tax tables, so you must learn it. Any unused amount carries forward one year only, and the current year's exemption is used first.
Nil rate band and rates: NRB £325,000; lifetime rate 20%; death rate 40%; The residence nil rate band (£175,000) does not apply to lifetime transfers. It is only relevant to a death estate.
Lifetime tax, trustees pay: Tax = 20% × (net chargeable transfer − NRB available); NRB available = £325,000 − CLTs in the previous seven years.
Lifetime tax, donor pays (gross up): Gross transfer = NRB available + (excess net ÷ 80%) ; tax = 20% × (gross transfer − NRB available); Tax on the excess = net excess × 20/80. The gross transfer is used for later cumulative totals.
Taper relief: 3–4 yrs 20%; 4–5 yrs 40%; 5–6 yrs 60%; 6–7 yrs 80% reduction in the tax; There is no relief for death within three years. It is a reduction in the tax charged at 40%, so the effective rates are 32%, 24%, 16% and 8%.
Additional tax on death: (40% tax on the CLT − taper relief) − lifetime tax paid, minimum nil; Compute the death tax using the NRB left after earlier gifts in the seven years before the CLT.

How to solve Lifetime Transfers into Trusts questions

Use this method for any question on settling assets into a trust, in lifetime or on later death.

1Identify who pays the tax: trustees or donor. Check the type of trust to confirm it is a CLT and not a PET.
2Compute the transfer of value, using the fall in the donor's estate. Deduct reliefs, then annual exemptions for the current and previous year.
3List all CLTs in the seven years before this transfer and total them. This gives the cumulative total, and the NRB available is £325,000 less this.
4Compute lifetime tax at 20% on the excess. If the donor pays, gross up by multiplying the net excess by 20/80 and use the gross transfer later.
5If the donor dies within seven years, retest the CLT at the date of death: apply the NRB left after earlier transfers, tax at 40%, then apply taper relief by years between gift and death.
6Deduct lifetime tax paid from the death tax. The result cannot go below nil, and no refund arises.
7State who is liable. Additional tax on death on a CLT is primarily the trustees' liability. The donor's personal representatives are liable only to the extent the tax remains unpaid. Show each working clearly for the marks.

Quickest way: Net, then gross, then death check

When to use it: Use for short ATX questions asking for lifetime IHT on a trust gift and the extra tax if the donor dies soon after.

Write the date and who pays at the top of the page.
Do a short table: transfer after reliefs and exemptions, then less NRB, then the excess.
Excess × 20% if trustees pay, or excess × 25% (20/80) if the donor pays.
Death tax: excess over the same NRB × 40% (use the gross transfer if the donor paid), × (1 − taper %).
Subtract lifetime tax paid. Floor at nil.

Common mistakes in Lifetime Transfers into Trusts

Treating the gift into a discretionary trust as a PET.
Students remember that lifetime gifts are PETs and forget that most gifts to trusts are not.
Fix: Ask who receives the gift. A gift to a discretionary trust is a CLT, so test it for IHT straight away.
Not grossing up when the donor pays the tax.
The question says the donor pays in a single sentence and students skip it.
Fix: Underline who pays. If the donor pays, use 20/80 on the excess and carry the gross figure into the cumulative total.
Using the wrong cumulative total for the nil rate band.
Students count all gifts ever made, or count gifts from seven years before death instead of before the gift.
Fix: Look back seven years from the date of the CLT being tested. For the death computation, use the NRB available at the date of the CLT.
Applying taper relief to the value of the gift or to the nil rate band.
The name suggests the transfer is reduced.
Fix: Taper relief only cuts the 40% tax, and only applies if the tax exceeds nil after the NRB. Apply it after the tax is computed.
Claiming a refund when lifetime tax exceeds the death tax.
Students subtract lifetime tax and leave a negative figure.
Fix: Stop at nil. There is no repayment of lifetime tax if the death computation produces less tax.
Deducting the annual exemption before business property relief, or forgetting the prior year.
The order of deductions is learned loosely.
Fix: Deduct relief first, then the current year annual exemption, then any unused exemption brought forward from the previous year.

Worked examples

Example 1

On 1 August 2025, Rhea settled £400,000 cash into a discretionary trust. She had made no earlier transfers and the annual exemptions for 2025/26 and 2024/25 are available (£3,000 each). The trustees paid any IHT. Compute the lifetime IHT.

Show the solution

Transfer of value: £400,000 (cash; the trustees pay the tax, so no gross up).
Deduct annual exemptions: £3,000 for 2025/26 and £3,000 for 2024/25, total £6,000. Net chargeable transfer is £394,000.
Cumulative total in the previous seven years is nil. NRB available is £325,000.
Excess over NRB: £394,000 − £325,000 = £69,000.
Tax at 20%: £69,000 × 20% = £13,800.

Answer: Lifetime IHT payable by the trustees is £13,800.

Example 2

On 1 June 2021, Dev settled £400,000 cash into a discretionary trust. Annual exemptions were used elsewhere. He had made no earlier transfers. Dev paid the lifetime tax himself. Dev died on 1 December 2025 (more than 4 but less than 5 years later). Compute the lifetime IHT and the additional tax payable on death. Ignore the effect of his death estate.

Show the solution

Net transfer is £400,000. Cumulative total in the previous seven years is nil, so NRB available is £325,000.
Net excess over NRB: £400,000 − £325,000 = £75,000.
Dev pays the tax, so gross up: lifetime tax = £75,000 × 20/80 = £18,750. Gross transfer = £400,000 + £18,750 = £418,750.
Check: gross excess £418,750 − £325,000 = £93,750; £93,750 × 20% = £18,750.
On death, retest the CLT using the gross transfer. Excess over the same NRB: £418,750 − £325,000 = £93,750.
Tax at 40%: £93,750 × 40% = £37,500.
Death is more than 4 but less than 5 years after the gift, so taper relief is a 40% reduction: £37,500 × 60% = £22,500.
Deduct lifetime tax paid: £22,500 − £18,750 = £3,750.

Answer: Lifetime IHT paid by Dev is £18,750. Additional tax payable on his death is £3,750, primarily a liability of the trustees.

Exam tips

Write 'trustees pay' or 'donor pays' in the margin before you start. This one fact decides whether you gross up.
Show the cumulative total as a short working. Markers award marks for the seven-year look back.
If a death occurs, set out the NRB, the 40% tax, the taper percentage and the lifetime tax deducted on separate lines.
Use the rates in the tax tables for the NRB, the 20% and 40% rates and the taper bands. Do not rely on memory for the bands.
Add a short comment on planning, such as using the NRB early or paying the tax from the trust, to earn professional skills marks.

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

Lifetime Transfers into Trusts in other exams

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

Lifetime Transfers into Trusts: frequently asked questions

Is a transfer into a trust always a CLT?

No. Gifts to discretionary trusts are CLTs, so tax may be due at once. Some other gifts, such as to certain disabled persons' trusts, can be PETs. Check the type of trust in the question.

How do I gross up a CLT?

If the donor pays the IHT, the tax is an extra loss to the estate. Take the net excess over the available NRB and multiply by 20/80. Add this tax to the net transfer to get the gross transfer.

Does taper relief reduce the value of the gift?

No. It reduces the 40% tax on the transfer. It only applies if the donor dies more than three years after the gift, and a tax charge must remain after the nil rate band.

What happens if lifetime tax was more than the death tax?

The extra tax on death is nil. HMRC does not repay the lifetime tax already paid. The CLT still counts in the cumulative total for later transfers.