Inheritance Tax may have to be paid on a person’s estate (their money and possessions) when they die. It’s only due if the estate is worth more than the threshold of £325,000.
Inheritance Tax is due at 40% on anything above the threshold of £325,000 - but there’s a reduced rate of 36% if the person’s will leaves more than 10% of their estate to charity.
Inheritance Tax can also apply when you’re alive if you transfer some of your estate into a trust.
When Inheritance Tax is due
The main situations when Inheritance Tax is due are:
- when assets are transferred into a trust
- when a trust reaches a 10-year anniversary of when it was set up (there are 10-yearly Inheritance Tax charges)
- when assets are transferred out of a trust (known as ‘exit charges’) or the trust ends
- when someone dies and a trust is involved when sorting out their estate
What you pay Inheritance Tax on
You pay Inheritance Tax on ‘relevant property’ - assets like money, shares, houses or land. This includes the assets in most trusts.
There are some occasions where you may not have to pay Inheritance Tax - for example where the trust contains excluded property.
Some types of trust are treated differently for Inheritance Tax purposes.
These are where the assets in a trust are held in the name of a trustee but go directly to the beneficiary, who has a right to both the assets and income of the trust.
Transfers into a bare trust may also be exempt from Inheritance Tax, as long as the person making the transfer survives for 7 years after making the transfer.
Interest in possession trusts
These are trusts where the beneficiary is entitled to trust income as it’s produced - this is called their ‘interest in possession’.
On assets transferred into this type of trust before 22 March 2006, there’s no Inheritance Tax to pay.
On assets transferred on or after 22 March 2006, the 10-yearly Inheritance Tax charge may be due.
During the life of the trust there’s no Inheritance Tax to pay as long as the asset stays in the trust and remains the ‘interest’ of the beneficiary.
Between 22 March 2006 and 5 October 2008:
- beneficiaries of an interest in possession trust could pass on their interest in possession to other beneficiaries, like their children
- this was called making a ‘transitional serial interest’
- there’s no Inheritance Tax to pay in this situation
From 5 October 2008:
- beneficiaries of an interest in possession trust can’t pass their interest on as a transitional serial interest
- if an interest is transferred after this date there may be a charge of 20% and a 10-yearly Inheritance Tax charge will be payable unless it’s a disabled trust
If you inherit an interest in possession trust from someone who has died, there’s no Inheritance Tax at the 10-year anniversary. Instead, 40% tax will be due when you die.
If the trust is set up by a will
Someone might ask that some or all of their assets are put into a trust. This is called a ‘will trust’.
The personal representative of the deceased person has to make sure that the trust is properly set up with all taxes paid, and the trustees make sure that Inheritance Tax is paid on any future charges.
If the deceased transferred assets into a trust before they died
If you’re valuing the estate of someone who has died, you’ll need to find out whether they made any transfers in the 7 years before they died. If they did, and they paid 20% Inheritance Tax, you’ll need to pay an extra 20% from the estate.
Even if no Inheritance Tax was due on the transfer, you still have to add its value to the person’s estate when you’re valuing it for Inheritance Tax purposes.
Trusts for bereaved minors
A bereaved minor is a person under 18 who has lost at least 1 parent or step-parent. Where a trust is set up for a bereaved minor, there are no Inheritance Tax charges if:
- the assets in the trust are set aside just for bereaved minor
- they become fully entitled to the assets by the age of 18
A trust for a bereaved young person can also be set up as an 18 to 25 trust - the 10-yearly charges don’t apply. However, the main differences are:
- the beneficiary must become fully entitled to the assets in the trust by the age of 25
- when the beneficiary is aged between 18 and 25, Inheritance Tax exit charges may apply
Trusts for disabled beneficiaries
There’s no 10-yearly charge or exit charge on this type of trust as long as the asset stays in the trust and remains the ‘interest’ of the beneficiary.
You also don’t have to pay Inheritance Tax on the transfer of assets into a trust for a disabled person as long as the person making the transfer survives for 7 years after making the transfer.
Paying Inheritance Tax
You pay Inheritance Tax using form IHT100. You can get the form and instructions to complete it on the HMRC website.
If you’re valuing the estate of someone who’s died, you may have to value other assets apart from trusts to see if Inheritance Tax is due.
More help and information
HMRC has produced detailed guidance on trusts and Inheritance Tax if you need more information - or you can contact the HMRC helpline.
Probate and Inheritance Tax Helpline
Telephone: 0300 123 1072
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