When a parent dies and leaves property on trust for a child, inheritance tax gives two favoured trust types. A bereaved minor trust under section 71A of the Inheritance Tax Act 1984 must give the child everything by 18 and suffers no 10 year or exit charges. An age 18 to 25 trust under section 71D can run until 25, again with no 10 year charges, but pays a reduced exit charge on property passing to the child after their 18th birthday.

Why do these special trust types exist?

Since the Finance Act 2006 changes, most lifetime and will trusts are “relevant property” trusts, which pay inheritance tax at each 10 year anniversary and when property leaves the trust. Before 22 March 2006 trusts for children often qualified as accumulation and maintenance trusts under section 71. The 2006 rules replaced that relief for new trusts with two narrower categories aimed at children who have lost a parent. Trustees of older accumulation and maintenance trusts had until 6 April 2008 to change the terms so that the child took the property at 18, convert to an 18 to 25 trust, or fall into the relevant property regime (IHTM42808).

What makes a trust a bereaved minor trust?

A bereaved minor is a person under 18 at least one of whose parents has died (section 71C). “Parent” includes a step parent and a person who had parental responsibility immediately before their death (section 71H). The trust can generally only be created:

  • under the will of the deceased parent, or on their intestacy (including where this is treated as happening after a deed of variation that meets section 142);
  • under the Criminal Injuries Compensation Scheme; or
  • under the Victims of Overseas Terrorism Compensation Scheme.

HMRC accepts that a trust arising on a grandparent’s intestacy can qualify where the child’s parent died first and the child takes the parent’s share at 18 (IHTM42815).

The terms must secure that the child becomes absolutely entitled to the capital, its income and any accumulated income by 18; that while the child is alive and under 18 any capital applied for a beneficiary is applied for them; and that either the child is entitled to all the income or no income is applied for anyone else. A power to benefit others up to an annual limit, the lower of £3,000 and 3% of the fund, and the statutory power of advancement do not spoil the status.

When does a bereaved minor trust pay inheritance tax?

Section 71B charges no tax when the child reaches 18 or becomes absolutely entitled earlier, when property is applied for the child’s benefit, or when the child dies under 18. Payments to someone else up to the annual limit are also free of charge.

In any other case where property stops being held on these trusts, or the trustees make a disposition that reduces the fund, a flat rate charge applies. The rate builds up by quarter years from when the property became held on the trust: 0.25% for each of the first 40 quarters, 0.20% for each of the next 40, and falling in steps after that (IHTM42802). Because the trust must end by the child’s 18th birthday the period counted is always shorter than 18 years, but a careless payment to a sibling or another relative can still trigger the charge.

Remember that the original transfer into the trust is part of the parent’s estate on death, so inheritance tax may already have been paid on it there. See the inheritance tax nil rate band for how that first charge is calculated.

How is an 18 to 25 trust different?

Section 71D applies the same logic but lets the trustees hold the fund until 25. The main differences are:

  • How it can be set up. Only under the will of a deceased parent or the two compensation schemes. Unlike a bereaved minor trust, it cannot arise under the intestacy rules (section 71D(2)).
  • The age. The beneficiary must become absolutely entitled to the capital and accumulated income by 25.
  • Exclusions. It cannot apply to property already within section 71A, or where the beneficiary has an immediate post death interest, a transitional serial interest or an interest in possession that began before 22 March 2006 (section 71D(5)).
  • Exit charges after 18. No charge arises if the beneficiary takes the property, has it applied for them or dies before 18. A charge does arise if they become absolutely entitled, have property applied for them, or die between 18 and 25.

HMRC takes the view that one 18 to 25 trust can cover several existing children, such as siblings sharing a fund, provided nobody else can become entitled later (IHTM42816).

How is the exit charge on an 18 to 25 trust calculated?

Section 71F sets out the formula: the chargeable amount multiplied by the settlement rate and by the relevant fraction.

  • The settlement rate is the effective rate on a notional lifetime transfer equal to the value of the fund when the trust began, taking into account the parent’s own chargeable transfers in the seven years before.
  • The relevant fraction is three tenths multiplied by the number of complete quarters from the beneficiary’s 18th birthday (or later start date) to the day before the charge, divided by 40.

Because the clock only starts at 18 and stops at 25, HMRC notes the maximum rate is seven tenths of 6%, which is 4.2%.

HMRC’s worked example

IHTM42816 takes a will that leaves residue of £1 million to two children, each taking their share at 21, with the deceased having a full nil rate band of £325,000. The notional tax is 20% of £675,000, or £135,000, giving a settlement rate of 13.5%. At 21 the relevant fraction is three tenths of 12 quarters out of 40, or 9%. When the elder child takes a £750,000 share, the tax is £750,000 at 13.5% at 9%, which is £9,112.50. The younger child’s later share of £760,000 bears £9,234.

What about income tax and capital gains tax?

A bereaved minor trust under a parent’s will or intestacy usually meets the “qualifying trusts” test in Finance Act 2005 section 35, so the trustees and child can make a vulnerable person election and pay income tax and capital gains tax at the child’s rates. That treatment stops when the child turns 18, because a relevant minor must be under 18 (section 39). See vulnerable beneficiary trusts.

When the child becomes absolutely entitled, the trustees are treated as disposing of the assets at market value for capital gains tax. Gift holdover relief under section 260 of the Taxation of Chargeable Gains Act 1992 is specifically available where no inheritance tax is charged because of section 71B(2) or section 71E(2), so the gain can pass to the child (section 260(2)(da) and (db)). The general mechanics are in gift holdover relief and capital gains tax for trustees.

What mistakes come up most often?

  • Drafting an age 25 trust for an intestacy. Only a will can create an 18 to 25 trust; the intestacy rules give a bereaved minor trust ending at 18.
  • Giving the child a life interest. An immediate post death interest takes the trust outside section 71D and into the ordinary interest in possession rules.
  • Wide powers to benefit others. Any power beyond the annual limit or the statutory advancement power can break the conditions from the start.
  • Ignoring the deed of variation route. A variation within two years of death that satisfies section 142 is treated as made by the deceased, so it can create a qualifying trust. See deeds of variation.
  • Missing holdover claims when the child takes the assets, leaving the trustees with a capital gains tax bill.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.