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

Types of Trust and IHT Classification for ACCA ATX-UK

Updated 11 October 2026 · Fact-checked

For IHT you first classify the trust. A bare trust is treated as the beneficiary's own property, so a gift to it is usually a PET. Most other trusts created in lifetime, including discretionary trusts, are relevant property trusts, so a transfer into them is a CLT taxed at 20% above the nil rate band.

Understand Types of Trust and IHT Classification

A trust is a legal arrangement. A settlor gives assets to trustees. The trustees hold them for beneficiaries. For IHT, the first job is to decide what type of trust you have, because the type decides how a transfer into it is taxed and how the trust is taxed afterwards.

A bare trust holds assets for one or more beneficiaries who are absolutely entitled to the capital and income. The beneficiary can call for the assets once of legal age. The gift is treated as a gift to the beneficiary, who is treated as owning the asset. A gift into a bare trust is therefore a potentially exempt transfer (PET). It becomes fully exempt if the donor survives seven years. If the donor dies within seven years, it is taxed, with taper relief where it applies.

An interest in possession (IIP) trust gives a beneficiary a right to the income as it arises. A discretionary trust gives the trustees power to decide who gets income and capital. For IHT, the key question is whether the trust is a relevant property trust. Broadly, a discretionary trust is relevant property. Most IIP trusts set up in lifetime after 21 March 2006 are also relevant property, because the income beneficiary is not treated as owning the capital.

A transfer into a relevant property trust is a chargeable lifetime transfer (CLT). It is chargeable at once. Tax is at the lifetime rate of 20% on the excess over the available nil rate band of £325,000. If the donor pays the tax, you gross up the gift. There may also be extra tax if the donor dies within seven years of the transfer, and there are periodic and exit charges on the trust itself.

There are exceptions to the post-2006 rule. An immediate post-death interest (IPDI) trust is created on death under a will, so there is no lifetime gift into it. It keeps the older IIP treatment, where the beneficiary is treated as owning the capital. A lifetime gift into a disabled person's trust can be a PET. A lifetime IIP trust created after 21 March 2006 is generally relevant property. In the exam, read the facts carefully for the date of creation, who can benefit and how.

Key rules to remember

Bare trust: Gift into bare trust = PET; Beneficiary is treated as owner. Exempt if the donor survives 7 years.
Relevant property trust: Lifetime transfer into discretionary trust or most post-2006 IIP trusts = CLT; Chargeable at once, even if the donor survives.
Lifetime IHT on a CLT: Tax = 20% × (CLT after exemptions − available nil rate band); Nil rate band is £325,000, reduced by CLTs in the previous 7 years.
Gross up when donor pays tax: Gross chargeable transfer = available nil rate band + (net chargeable amount above the available nil rate band × 100 ÷ 80); Use this where the donor pays the lifetime tax. First deduct the donor's annual exemptions from the gift. The available nil rate band is £325,000 less CLTs in the previous 7 years. Gross up only the net amount above that available band. If the band is already used up, gross up the whole net chargeable amount.
Death rate and taper relief: Death rate 40%. Taper relief: 3-4 yrs 20%, 4-5 yrs 40%, 5-6 yrs 60%, 6-7 yrs 80%; Taper reduces the tax, not the value. It applies only if tax is due after using the nil rate band. There is no taper relief where death occurs within 3 years of the transfer.
Residence nil rate band: RNRB £175,000; Not available against lifetime gifts to a trust. It applies to the death estate.

How to solve Types of Trust and IHT Classification questions

Use this order for any question on trust types and the IHT treatment of a transfer.

1Identify the trust from the facts: who gets income, who gets capital, and whether the trustees have discretion.
2Note the date the trust was created and whether it arose in lifetime or on death.
3Decide if the beneficiary is treated as owning the capital. If so, as with a bare trust, the gift is a PET. If not, it is relevant property.
4Classify the transfer: PET for a bare trust or qualifying trust, CLT for a relevant property trust.
5Compute the value transferred, using the loss to the donor's estate. Deduct exemptions: annual exemption and any other available.
6For a CLT, use the nil rate band remaining after CLTs in the previous 7 years. Charge the excess at 20%. Gross up if the donor pays.
7State the consequences: PET exempt on survival, CLT possible extra tax at death, and later trust charges.
8Write the conclusion in a short sentence that answers the requirement.

Quickest way: Two-question trust classifier

When to use it: Use this when time is tight and you only need to classify a transfer.

Ask: does the beneficiary have an absolute right? If yes, it is a bare trust and a PET.
If no, ask: is it a discretionary trust or a post-2006 lifetime IIP trust? If yes, it is relevant property and a CLT.
Check for an exception such as a disabled person's trust, which can give PET treatment.
Then do the numbers: exemptions, nil rate band, 20% on the excess.

Common mistakes in Types of Trust and IHT Classification

Treating every gift into a trust as a PET.
Students remember that most lifetime gifts to individuals are PETs.
Fix: Only gifts to individuals, bare trusts and certain qualifying trusts are PETs. A gift to a discretionary trust is a CLT.
Using the old pre-2006 IIP rule for a new trust.
Older notes show the beneficiary being treated as owner of the capital.
Fix: Check the creation date and type. A lifetime IIP trust created after 21 March 2006 is generally relevant property.
Forgetting to deduct the annual exemption from a CLT.
Students jump to the nil rate band.
Fix: Deduct available annual exemptions first, including the unused one from the previous year. Then apply the nil rate band.
Using the 40% death rate on the lifetime transfer.
Students mix up lifetime and death rates.
Fix: The lifetime rate on a CLT is 20%. The 40% rate applies on death within seven years, with credit for tax paid.
Not grossing up when the donor pays the tax.
The wording about who pays is easy to miss.
Fix: If the donor pays, the tax adds to the loss to the estate. Deduct annual exemptions first, then gross up the net chargeable amount above the available nil rate band by 100 ÷ 80. The available band is £325,000 less CLTs in the previous 7 years.
Applying the residence nil rate band to a transfer into a trust.
Students know the £175,000 figure and apply it everywhere.
Fix: Use only the £325,000 nil rate band for lifetime transfers. The residence nil rate band relates to the death estate.

Worked examples

Example 1

Priya gives £200,000 in cash to a discretionary trust for her family. She has made no earlier gifts. She did not use her annual exemption last year, so last year's £3,000 is available as well as this year's. Explain the IHT treatment and compute the lifetime IHT.

Show the solution

A discretionary trust is a relevant property trust, so the gift is a CLT.
Value transferred is £200,000.
Deduct annual exemptions: £3,000 for this year (used first) and £3,000 carried forward from last year because it was unused, total £6,000.
Chargeable amount is £200,000 − £6,000 = £194,000.
Nil rate band of £325,000 is fully available, as there are no earlier CLTs.
The chargeable amount of £194,000 is below £325,000, so no tax is due. Who would pay is therefore irrelevant.

Answer: The gift is a CLT. The chargeable amount is £194,000 and the lifetime IHT is nil. The CLT stays in the cumulation for seven years and reduces the nil rate band available for later transfers.

Example 2

Sam gives £400,000 in cash to a discretionary trust, after annual exemptions have been used elsewhere. He has made no earlier gifts. Sam pays the IHT. Compute the lifetime IHT and state how the gift is treated.

Show the solution

A gift to a discretionary trust is a CLT.
Chargeable amount is £400,000.
Nil rate band of £325,000 covers the first slice, leaving £400,000 − £325,000 = £75,000 above it.
The donor pays the tax, so gross up: £75,000 × 100 ÷ 80 = £93,750.
Tax is 20% × £93,750 = £18,750.
Check: £75,000 + £18,750 = £93,750, so the gross is consistent.
Gross chargeable transfer is £325,000 + £93,750 = £418,750.

Answer: The gift is a CLT. Lifetime IHT is £18,750 and the gross transfer is £418,750.

Exam tips

Write the classification first. Marks are given for stating 'CLT because relevant property trust' or 'PET because bare trust'.
Check the date of creation and the type of interest before you apply any rule.
Show the nil rate band working and say who pays the tax. This decides whether you gross up.
Use the tax tables for £325,000, 20%, 40% and taper percentages. Do not rely on memory.
Add a short comment on consequences, such as seven-year survival or later trust charges, to earn the application marks.

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

Types of Trust and IHT Classification: frequently asked questions

What is the difference between an interest in possession and a discretionary trust for IHT?

In an interest in possession trust, a beneficiary has a right to the income as it arises. In a discretionary trust, the trustees decide who benefits. For IHT, a lifetime gift into either is usually a CLT if the trust is relevant property. The main exceptions are some older or special trusts.

What is a relevant property trust?

It is a trust whose property is taxed under the special trust regime. Discretionary trusts are the main example, along with most IIP trusts set up in lifetime after 21 March 2006. Such trusts can face periodic and exit charges as well as an entry charge.

Is a gift to a bare trust a PET?

Yes. The beneficiary is absolutely entitled to the capital and income and is treated as owning the assets. The gift is treated like a gift to the beneficiary. It is exempt if the donor survives seven years.

Is a gift to a discretionary trust always a CLT?

It is a CLT in the usual case. Special trusts, such as a disabled person's trust, can be treated differently. Read the facts closely.