A lifetime gift into a relevant property trust, such as a discretionary trust, is not a potentially exempt transfer. It is a chargeable lifetime transfer: Inheritance Tax is due straight away at 20% on the amount that takes the settlor’s seven year total of chargeable transfers above the £325,000 nil rate band. If the settlor dies within seven years, the gift is taxed again at the death rate, with taper relief and a credit for the tax already paid, but never with a refund.

Which gifts are chargeable lifetime transfers?

Since 22 March 2006, section 3A(1A) of the Inheritance Tax Act 1984 limits potentially exempt transfers to three kinds of gift: an outright gift to another individual, a gift into a trust for a disabled person, and a gift into a bereaved minor’s trust when an immediate post death interest ends. Any other lifetime transfer of value is immediately chargeable. HMRC’s manual at IHTM04067 gives the two common examples: a transfer into a relevant property trust, and a transfer to a company.

Most property held in trusts is “relevant property”. GOV.UK’s trusts guidance lists the exceptions, which are mainly interest in possession trusts created before 22 March 2006, transitional serial interests, interest in possession trusts created by a will or intestacy, and trusts for disabled people, bereaved minors and 18 to 25 trusts. In practice this means a gift by a living person into a discretionary trust, or into most lifetime interest in possession trusts set up today, is a chargeable lifetime transfer.

How is the lifetime charge worked out?

Section 7 charges tax on a cumulative basis. The value transferred is added to the settlor’s other chargeable transfers in the previous seven years, and tax is charged on the part of that total which exceeds the nil rate band. For lifetime transfers section 7(2) applies half the death rate, which HMRC confirms at IHTM14534 for transfers since 15 March 1988. GOV.UK states the result: if the trustees pay, the rate is 20% on everything above the £325,000 threshold.

The value is the loss to the settlor’s estate, after any exemptions available. The annual exemption can reduce a gift into trust in the same way as an outright gift; see the annual exemption and small gifts. Potentially exempt transfers made earlier are ignored at this stage, because they only become chargeable if the donor dies within seven years.

Does it matter who pays the lifetime tax?

Yes. The settlor is primarily liable, but the trustees can pay instead (IHTM14012). If the trustees pay out of the trust fund, the tax is simply 20% of the excess. If the settlor pays, the tax itself is part of the loss to their estate, so the gift has to be grossed up. HMRC’s example at IHTM14012 uses a transfer of £425,000 to a discretionary trust with a full £325,000 nil rate band available:

Who pays Value transferred Lifetime tax
Trustees £425,000 £20,000 (20% of £100,000)
Settlor £450,000 after grossing up £25,000 (20% of £125,000)

The grossed up figure also uses more of the settlor’s seven year total, which affects later gifts.

When must the transfer be reported and the tax paid?

The settlor reports the gift on form IHT100 with the relevant event form. Under section 216(6)(c), the account is due within 12 months from the end of the month in which the transfer is made. Payment is due earlier: section 226(1) sets the due date as six months after the end of the month of the transfer, except that for a lifetime transfer made between 6 April and 30 September the tax is due at the end of April in the following year.

Many smaller gifts into trust do not need an IHT100 at all. The Inheritance Tax (Delivery of Accounts) (Excepted Transfers and Excepted Terminations) Regulations 2008 treat a transfer as excepted if:

  • it consists only of cash or quoted shares and securities, and the settlor’s cumulative chargeable transfers including this one do not exceed the nil rate band (IHTM06103); or
  • it includes other assets, the cumulative total does not exceed 80% of the nil rate band, and the value transferred, ignoring business and agricultural relief, does not exceed the nil rate band still available (IHTM06104).

Excepted transfers still count if the settlor dies within seven years and must then be included in the estate’s Inheritance Tax account (IHTM06100, IHTM06111).

What happens if the settlor dies within seven years?

Section 7(4) removes the half rate for a chargeable transfer made within seven years before death and recalculates the tax at the full rate, using the rate table in force at death if the nil rate band has since increased (Schedule 2, paragraph 2). Where the transfer was more than three years before death, taper relief charges only a percentage of the full rate:

Years between gift and death Percentage of full rate
More than 3, up to 4 80%
More than 4, up to 5 60%
More than 5, up to 6 40%
More than 6, up to 7 20%

The lifetime tax is credited against the recalculated figure (GOV.UK). If the recalculated tax is lower than the tax already paid, section 7(5) leaves the lifetime charge in place, so there is never a repayment. Any additional tax is due six months after the end of the month of death (section 226(3B)). GOV.UK says the trustees are liable for it; the personal representatives are only liable if no one else is, or if the tax is still unpaid 12 months after the end of the month of death (section 204(8)).

The transfer also stays in the settlor’s cumulative total. HMRC’s example at IHTM14513 shows a gift into a discretionary trust more than seven years before death still being counted when working out the tax on a later failed gift, which is why advisers look back up to 14 years; see the seven year rule and taper relief.

What does a full calculation look like?

Illustration only. A settlor with no previous chargeable transfers, and whose annual exemptions are already used, gives £400,000 in cash to a discretionary trust. The trustees pay the tax and the nil rate band stays at £325,000.

  • Lifetime tax: £400,000 less £325,000 leaves £75,000. At 20% the trustees pay £15,000.
  • Death four and a half years later: tax at the full rate would be £30,000 (40% of £75,000). Taper relief charges 60% of that, which is £18,000. After the £15,000 credit, the trustees owe a further £3,000.
  • Death six and a half years later: 20% of £30,000 is £6,000, less than the £15,000 already paid. Nothing more is due and nothing is repaid.

What other charges follow once assets are in the trust?

A relevant property trust is taxed in its own right. GOV.UK explains that there is a charge on each ten year anniversary if the relevant property exceeds the threshold, and an exit charge of up to 6% when assets leave the trust, with no exit charge on distributions within three months of setting up the trust or of a ten year anniversary. The residence nil rate band does not apply to a home given to a discretionary trust during the settlor’s life, even if the beneficiaries are their children. If the settlor keeps a benefit, for example by living in a house they put into trust, the gift is also a gift with reservation, and only the higher of the two charges is applied on death.

What mistakes come up most often?

  • Treating a gift into a discretionary trust as a potentially exempt transfer and not reporting it.
  • Missing the payment date, which for gifts made between 6 April and 30 September is 30 April of the following year.
  • Assuming business property is automatically excepted; relief is ignored for the excepted transfer tests. See business relief for how the relief itself works.
  • The settlor paying the tax without grossing up the gift.
  • Executors overlooking an excepted transfer into trust when working out the estate’s nil rate band.

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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.