The 10-Year Periodic Charge on Discretionary Trusts Explained

Discretionary trusts are one of the most powerful tools in inheritance tax (IHT) planning — but they are not free. HMRC imposes a series of charges on assets held inside a discretionary trust: the entry charge when the trust is set up, the 10-year periodic charge at each decade anniversary, and the exit charge when assets leave the trust. Understanding these charges — and when they are worth paying — is essential before settling assets into trust.

The overarching purpose of the charges is to simulate the IHT that would have applied had the assets remained in the settlor's estate and been inherited on death every generation. In practice, trusts still offer significant advantages in many situations — but this requires careful modelling.

The Entry Charge (Chargeable Lifetime Transfer)

When an individual settles assets into a discretionary trust during their lifetime, this is treated as a chargeable lifetime transfer (CLT). If the value of assets settled — together with any other CLTs made in the previous seven years — exceeds the nil-rate band (NRB), the excess is subject to IHT at 20% (half the death rate of 40%).

The NRB is £325,000 (frozen at this level until April 2031). If you have made no other CLTs in the previous seven years, you can settle up to £325,000 into trust with no immediate charge. For a couple who coordinate, this can be doubled to £650,000.

Assets settled above the NRB are taxed at 20% on entry. This is the first cost consideration.

The 10-Year Periodic Charge

At each 10-year anniversary of the trust's creation, HMRC levies a periodic charge on the trust's assets. The maximum rate is 6% of the value of the trust fund above the NRB. In practice, the effective rate is usually less than 6% because the calculation applies the "effective rate" based on the tax that would have been due on a notional transfer.

The simplified formula:

1. Take the value of the trust fund at the 10-year anniversary.
2. Add the "historical value" of any assets that left the trust in the previous 10 years (broadly, prior distributions).
3. Calculate the IHT that would be due on this notional transfer above the NRB using the lifetime rate (20%).
4. Express this as a percentage of the full notional transfer — this is the "effective rate".
5. Multiply the effective rate by 30% — this gives the "appropriate fraction" (a dampening factor).
6. Apply this rate to the trust fund value above the NRB.

In the straightforward case where the trust fund exceeds the NRB and there have been no distributions:

• Trust fund: £1,000,000
• NRB: £325,000
• Chargeable amount: £675,000
• IHT at 20% on a hypothetical lifetime transfer: £135,000
• As a percentage of £1,000,000: 13.5%
• Multiply by 30%: 4.05%
• Applied to the chargeable trust value (£675,000): approximately £27,338

So roughly £27,000 every 10 years on a £1m trust. This is the "cost" of the trust structure.

The Exit Charge

When assets leave the trust — either distributed to beneficiaries or appointed outright — an exit charge applies. The rate is broadly proportional to the periodic charge rate that would have applied at the most recent 10-year anniversary, scaled by the fraction of the 10-year period that has elapsed since that anniversary.

Exit charges are typically small in the early years of a trust or in the period immediately following a 10-year charge, but they must be factored into planning when making distributions.

Why Trusts Are Still Worthwhile Despite the Charges

The periodic charge feels significant but must be weighed against the IHT that would have applied if the assets had remained in the settlor's estate.

Scenario comparison:

An individual settles £1,000,000 into a discretionary trust and dies 25 years later. The trust fund has grown to £2,500,000.

• Without the trust: The £2,500,000 estate is subject to IHT at 40% on death. IHT bill: £700,000+ (after NRB).
• With the trust: Two 10-year periodic charges apply over 25 years. At 4-6% each time, the total charges might be £80,000-£130,000. The trust fund passes to beneficiaries at a fraction of the IHT cost that would have applied on death.

The saving — even after periodic charges — can be several hundred thousand pounds. For estates substantially above the NRB, the numbers almost always favour the trust structure.

The advantage is magnified when:

• The assets grow rapidly inside the trust (the periodic charge is on the trust value at the anniversary, but growth compounds inside the trust free of personal estate for IHT purposes).
• The settlor lives many years after settling the assets.
• The beneficiaries are grandchildren or great-grandchildren (the trust skips a generation of IHT that would otherwise have applied on each inheritance).

The Nil-Rate Band and the Residential NRB

The NRB available to the trust is not enhanced by the Residential Nil-Rate Band (RNRB). The RNRB (currently up to £175,000 per person) only applies where a residential property passes directly to lineal descendants on death. Assets in a discretionary trust cannot benefit from the RNRB.

This is an important consideration: if the primary motivation for trust planning is to pass on property, alternative structures (such as direct ownership with a will trust) may be more efficient.

Excluded Property Trusts for Non-Domiciliaries

For non-UK domiciled individuals, a discretionary trust settled with excluded property (overseas assets settled while non-UK domiciled) sits entirely outside the UK IHT system — no entry charge, no periodic charge, no exit charge on those excluded assets. This is a fundamentally different (and more advantageous) position from a trust settled by a UK-domiciled individual.

Under the rules in force from April 2025, excluded property trusts remain effective even after the settlor becomes a Long-Term Resident for IHT purposes — provided the trust was properly constituted before that status was triggered. This makes excluded property trusts one of the most time-sensitive planning tools available to non-doms: once the 10-year Long-Term Resident threshold is crossed, the opportunity to settle on excluded property terms is gone.

When Are Trusts Less Suitable?

Discretionary trusts involve ongoing administration costs and complexity: annual trustee meetings, trust accounts, periodic charge calculations, and reporting obligations under the Trust Registration Service (TRS). For smaller estates where the IHT saving is modest, the administrative burden may not be justified.

Trusts are also illiquid structures — you cannot easily take assets back as settlor, and income inside the trust is taxed at the trust rate (45% on income above a small standard rate band; 39.35% on dividends). For settlors who want to retain access to their assets, an offshore bond inside a trust can mitigate some of the income tax drag.

How Global Investments Can Help

Discretionary trusts require careful structuring, legal drafting, and ongoing administration. The periodic charge calculations must be accurate — errors can result in underpayment and penalties from HMRC. Global Investments works alongside specialist trust lawyers and tax advisers to help clients establish, manage, and review discretionary trust structures. Whether you are considering setting up a trust, approaching a 10-year anniversary, or reviewing whether an existing structure still makes sense, we can coordinate the professional team and ensure the trust delivers its intended benefits.