Putting assets into a trust during your lifetime is usually a chargeable lifetime transfer for inheritance tax, a disposal at market value for capital gains tax, and the start of the trustees’ own reporting duties. In practice there are four sets of steps: work out the inheritance tax and file form IHT100 where needed, decide whether to claim holdover relief, register the trust on the Trust Registration Service, and set up the income tax position, including whether the settlor will be taxed on the trust income.

Does the type of trust change the tax on day one?

Yes, more than anything else. Section 49(1A) of the Inheritance Tax Act 1984 says that an interest in possession arising on or after 22 March 2006 only counts as the beneficiary owning the trust property if it is an immediate post death interest, a disabled person’s interest or a transitional serial interest. An immediate post death interest can only arise under a will or intestacy, so for a lifetime settlement HMRC’s manual at IHTM16061 confirms that a new life interest trust is relevant property, just like a discretionary trust.

That gives three broad outcomes for a lifetime gift:

  • Discretionary trusts and lifetime life interest trusts are relevant property. The gift is an immediately chargeable transfer and the trust then faces ten year and exit charges. See what relevant property means for trusts.
  • Bare trusts are not settled property at all (IHTM16030). HMRC’s guidance on trusts and Inheritance Tax says a transfer into a bare trust is exempt if the person making it survives seven years.
  • Trusts for a disabled person that meet section 89 are potentially exempt transfers under section 3A(1A)(c)(ii). See disabled person’s interests in trusts.

HMRC’s guidance also points out that each asset in a trust has its own identity for inheritance tax, so one settlement can hold a discretionary fund and a disabled person’s fund side by side, each taxed on its own rules.

How much inheritance tax is due when the trust is funded?

The value transferred is the loss to the settlor’s estate, not simply the value of the asset received by the trustees. HMRC’s guidance explains that you add the chargeable transfers the settlor made in the previous seven years and that tax is due on everything above the nil rate band. HMRC’s table of thresholds shows the nil rate band at £325,000 for every year from 6 April 2009 to 5 April 2031, so it is £325,000 for 2026 to 2027.

If the trustees pay, the lifetime rate is 20%. If the settlor pays, the tax itself is a further loss to the estate and the gift has to be grossed up, which increases the tax; see chargeable lifetime transfers into trust for the mechanics. The annual exemption of £3,000, plus any unused amount from the previous tax year, can reduce the transfer, and HMRC’s own excepted transfer example at IHTM06103 deducts annual exemptions from a gift into a relevant property trust.

If the settlor dies within seven years, HMRC’s guidance says the transfer is recalculated at the death rate of 40%, with credit for the 20% already paid, and the trustees pay the extra.

How might the numbers look?

Illustration only. On 15 June 2026 Gwen, who has made no gifts before, puts £400,000 cash into a discretionary trust for her grandchildren. The trustees agree to pay the tax.

Step Amount
Cash transferred £400,000
Less annual exemptions for 2026 to 2027 and 2025 to 2026 (£6,000)
Chargeable transfer £394,000
Less nil rate band (£325,000)
Taxable at 20% £69,000
Lifetime tax payable by trustees £13,800

Because the gift is made between 6 April and 30 September, the tax is due at the end of April 2027. The IHT100 is due by 30 June 2027. Gwen gives cash, so there is no capital gains tax.

When must the IHT100 be filed and the tax paid?

Under section 216(6)(c) the account is due within 12 months from the end of the month in which the transfer is made or, if later, three months from the date the person first becomes liable. Under section 226(1) the tax is due six months after the end of the month of the transfer, except that for a lifetime transfer made after 5 April and before 1 October it is due at the end of April in the following year. HMRC’s IHT100 guidance says a gift on which tax is payable immediately is reported on IHT100 with event form IHT100a. The full process is covered in reporting a gift into trust on form IHT100.

No account is needed for an excepted transfer. Where the gift is wholly cash or quoted shares, IHTM06103 says it is excepted if the settlor’s chargeable transfers in the previous seven years plus this one do not exceed the nil rate band. For any other asset, IHTM06104 sets two tests: the cumulative total must not exceed 80% of the nil rate band, and the value transferred, ignoring business and agricultural relief, must not exceed the nil rate band available.

Section 199(1) makes the settlor liable for the tax, but the trustees and anyone the property is applied for are also liable, which is why the trust deed and the funding letter should say who will pay.

Does the settlor pay capital gains tax on the assets transferred?

Section 17(1)(a) of the Taxation of Chargeable Gains Act 1992 treats a transfer into settlement by a settlor as made at market value. Section 286(3) makes the trustees connected with the settlor, so under section 18(3) any loss on the transfer can only be set against gains on later disposals to the same trustees.

Where the gift is a chargeable transfer for inheritance tax and not a potentially exempt transfer, section 260 allows the gain to be held over, reducing both the settlor’s gain and the trustees’ base cost. Where the trustees are the transferee, section 260(1)(c) says the claim is made by the settlor alone. The relief applies even if no inheritance tax is actually payable because the gift is within the nil rate band. Section 169B blocks it where the settlor, or an arrangement for the settlor, has an interest in the trust. See section 260 holdover relief on gifts into trust.

When does the trust have to be registered with HMRC?

HMRC’s guidance on the Trust Registration Service says all UK resident express trusts must register unless they fall within the Schedule 3A exclusions, and that failing to register may lead to a £5,000 penalty. A trust created after 6 October 2020 must register within 90 days of being created or of becoming liable for tax. A taxable trust created on or after 6 April 2021 must register within 90 days of becoming liable for tax.

The general exclusion in that guidance only covers a trust with no interest in UK property, no assets of appreciable worth over £2,000, cumulative property never over £10,000, income under £5,000 a year and no UK tax liability, and only one such trust per settlor. A trust funded with a material sum will rarely qualify. See the Trust Registration Service.

How will the trust’s income be taxed from the start?

HMRC’s guidance on trusts and Income Tax gives these rates for 2026 to 2027:

  • Discretionary and accumulation trusts pay 45% on most income and 39.35% on dividends, after a tax free amount of normally £500. That amount is divided between all the discretionary trusts the settlor has made, with a floor of £100 a trust where there are five or more.
  • Interest in possession trusts pay 20% on most income and 10.75% on dividends.

Two rules can move the income onto the settlor. Section 624 of the Income Tax (Trading and Other Income) Act 2005 treats income as the settlor’s if it arises from property in which the settlor has an interest. Section 629 does the same where income is paid to or for a minor child of the settlor, unless that child’s income from the settlement is £100 or less in the tax year. See settlor interested trusts. The trustees then file the SA900 Trust and Estate Tax Return, by 31 January online or 31 October on paper.

What if the settlor can still benefit from the trust?

HMRC’s guidance says that if you make a gift into any type of trust but continue to benefit from it, you pay 20% on the transfer and the gift still counts as part of your estate on death, with only the higher of the two charges applied. On top of that, holdover relief is blocked by section 169B and the income is taxed on the settlor under section 624. A settlor who wants to be a possible beneficiary should model all three effects before signing the deed.

What mistakes come up most often?

  • Treating a lifetime life interest trust for adult children as a potentially exempt transfer. Since 22 March 2006 it is a chargeable transfer.
  • Ignoring chargeable transfers in the previous seven years, which use up the nil rate band and can make the gift reportable.
  • The settlor paying the tax without grossing up the transfer.
  • Claiming section 260 holdover on a trust where the settlor or their spouse can benefit.
  • Assuming a trust funded with cash needs no Trust Registration Service entry.
  • Forgetting that HMRC’s guidance dates the ten year charge from when the trust was set up, so the anniversary should be diarised on day one. See the ten year charge.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.