When property leaves a relevant property trust, or otherwise stops being relevant property, section 65 of the Inheritance Tax Act 1984 imposes a proportionate or exit charge of up to 6%. Before the first ten year anniversary the rate is based on what the trust was worth when it was set up, not what it is worth now, so a trust funded within the settlor’s available nil rate band can usually make distributions at a nil rate throughout its first ten years. After an anniversary, the rate is a fraction of the rate charged at the last anniversary.

When does an exit charge arise?

Section 65(1) charges tax where property in a settlement ceases to be relevant property, or where the trustees make a disposition that reduces the value of the relevant property. HMRC’s guidance on trusts and Inheritance Tax lists the usual triggers:

  • the trust comes to an end;
  • assets are distributed to beneficiaries;
  • a beneficiary becomes absolutely entitled to an asset, for example on reaching a stated age;
  • an asset moves into a special trust, such as a charitable trust or a trust for a disabled person, and stops being relevant property;
  • the trustees enter into a non commercial transaction that reduces the value of the fund.

Section 65(9) also treats a deliberate failure by the trustees to exercise a right as a disposition. The amount charged is the fall in value of the relevant property, not simply the value of what the beneficiary receives (section 65(2)).

When is there no exit charge?

  • The first quarter. Section 65(4) prevents a charge if the event happens in the quarter beginning with the day the settlement commenced or with a ten year anniversary.
  • Costs and income. Section 65(5) excludes payments of costs or expenses fairly attributable to relevant property, and payments that are income of the recipient for Income Tax.
  • Excluded property, such as some foreign property, as HMRC’s guidance notes.
  • Will trusts. Under section 144, trustees of a trust created by will can distribute within two years of the death without a proportionate charge (IHTM42117); the distribution is read back into the will instead.

There is a catch. IHTM42117 points out that where no charge arises in the first quarter, or under section 144, the trustees cannot claim Capital Gains Tax holdover relief under section 260 of the Taxation of Chargeable Gains Act 1992. Timing a distribution to avoid a small Inheritance Tax charge can therefore produce a larger Capital Gains Tax bill; see gift holdover relief.

How is the rate worked out in the first ten years?

Section 68 sets the rate before the first ten year anniversary. IHTM42114 breaks it into steps.

  1. Notional transfer. The value of the relevant property when the trust started, plus later additions valued when they were added, plus property that later became relevant property, plus the starting value of related settlements and any same day additions. All are historic values before reliefs; IHTM42165 confirms business and agricultural relief are not deducted from the starting value for this purpose.
  2. Nil rate band available. The current nil rate band, £325,000, less the settlor’s chargeable transfers in the seven years before the trust started, including potentially exempt transfers that became chargeable because the settlor died.
  3. Initial rate. Tax the excess at 20%, divide by the notional transfer and multiply by 3/10.
  4. Time fraction. Multiply by the number of complete quarters from the start of the trust to the day before the exit, over 40 (section 68(2)).
  5. Later additions. For property added after the start, quarters before it became relevant property in the trust are not counted (section 68(3)).

Is there a first ten year exemption?

Not in those words, but the effect is real. Because the section 68 calculation uses the historic value at the start, growth in the fund during the first ten years does not affect the rate. IHTM42114 says that if the notional transfer is less than the nil rate band available, the rate is nil and no tax is payable. So if a settlor with no chargeable transfers in the previous seven years puts £300,000 into a discretionary trust and adds nothing more, every distribution in the first ten years is at a nil rate, however large the fund becomes.

Three things can undo this. The settlor’s own chargeable gifts in the seven years before the trust started use up the band. Additions to the trust, or to another trust on the same day, swell the notional transfer. And the nil rate band in force when the exit happens is the one used, so a lower band in future would reduce the headroom. A nil rate exit is still a chargeable event, so the trustees should consider whether an IHT100 is needed.

How is the rate worked out after a ten year anniversary?

Section 69 takes the rate charged at the most recent anniversary and multiplies it by the number of complete quarters since that anniversary, over 40. In HMRC’s example at IHTM42115, an anniversary rate of 3.3% and a distribution ten complete quarters later gives 0.825%. If the anniversary rate was nil, the exit is at a nil rate too. The ten year charge therefore sets the rate for the following decade.

The anniversary rate is recalculated if, since that anniversary, the settlor has added property, made a same day addition, or property has become relevant property. HMRC’s example shows an addition of £200,000 raising the rate from 3.3% to 4.071%. It is also recalculated if the nil rate band has fallen, but not if it has risen. For charges on or after 6 April 2026, IHTM42165 says the rate is based on the value of relevant property at the anniversary without deducting business or agricultural relief given on that occasion; for earlier charges it was the value after relief. Trusts holding business property may therefore see higher exit rates than before.

When does the charge need grossing up?

If the trustees pay the tax out of the relevant property that remains in the trust, the beneficiary receives a net sum and the charge is on the grossed up amount (section 65(2)(b)). IHTM42118 gives the arithmetic: at a 2% rate, a net £100,000 distribution grosses up to £102,041, with tax of £2,041. There is no grossing if the beneficiary bears the tax, if it is paid from non relevant property, or if the distribution ends the trust.

How might the figures look?

Illustration only. A trust started on 1 March 2020 with £200,000. In the seven years before, the settlor had made chargeable transfers of £250,000. On 15 March 2026 the trustees appoint £150,000 to a beneficiary, who pays the tax.

Step Figure
Notional transfer (starting value) £200,000
Nil rate band available (£325,000 less £250,000) £75,000
Excess taxed at 20% £25,000
Initial rate (£25,000 divided by £200,000, times 3/10) 3.75%
Complete quarters to 14 March 2026 24
Exit rate (3.75% times 24/40) 2.25%
Tax on £150,000 £3,375

Had the settlor made no earlier chargeable transfers, the notional transfer of £200,000 would have been within the £325,000 band and the tax would have been nil.

What mistakes come up most often?

  • Using the current value of the fund for a pre anniversary exit instead of the starting value.
  • Counting part quarters, or counting to the exit date rather than the day before.
  • Deducting business or agricultural relief from historic values in the rate calculation.
  • Forgetting to gross up when the trustees pay from the remaining fund.
  • Missing the six month deadline. HMRC’s guidance says trustees must pay the tax and deliver the IHT100 by the end of the sixth month after the event.

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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.