The Relevant Property Regime

The relevant property regime is the way Inheritance Tax - An Overview taxes most trusts. Instead of taxing the trust fund once on someone's death, it applies a running series of charges for as long as the property stays in trust: a charge when assets go in, a charge on every tenth anniversary, and a charge when assets come out. It is the price of the flexibility a discretionary trust gives you, and it is the tax spine behind the Discretionary Trust of Residue.

The rules live in the Inheritance Tax Act 1984, ss.58–69. This page explains what "relevant property" is, which trusts fall inside the regime, and how each of the three charges is actually calculated - with worked figures you can follow.

What "relevant property" is#

Relevant property is settled property in which no individual has a qualifying interest in possession (IHTA 1984, s.58). Put plainly: if no one has a fixed, present right to the trust's income or to occupy its property, the assets are "relevant property" and the regime bites.

That definition is really a test of entitlement. Where a specific person is treated as owning the trust assets for IHT - because they have a qualifying interest, or because the trust is bare - the assets sit in their estate and are taxed there instead. Where no one is treated as owning them, the trust itself becomes the taxable unit, and the relevant property charges apply. The Understanding Trusts - A Plain-English Guide guide sets out the underlying trust types; this page is about how they are taxed.

The 22 March 2006 dividing line#

Before 22 March 2006, a lifetime interest-in-possession trust was outside the regime: the life tenant was treated as owning the fund. The Finance Act 2006 changed that overnight. From that date, almost every new lifetime trust - discretionary or interest in possession - falls inside the relevant property regime, with only a short list of exceptions. That single reform is why the regime now catches the great majority of trusts created today.

Inside vs outside - quick reference#

Inside the regime (relevant property)	Outside the regime
Discretionary trusts (lifetime and will) - e.g. Discretionary Trust of Residue	Bare trusts (beneficiary taxed as outright owner)
Almost all lifetime interest-in-possession trusts created on/after 22 Mar 2006	Qualifying IIP and pre-22 Mar 2006 IIP trusts (life tenant treated as owner)
Accumulation & maintenance trusts (special status removed)	Immediate post-death interests (IPDIs) - see Interest in Possession (IIP)
Nil-rate-band discretionary will trusts (discretionary, but usually funded within the NRB)	Disabled person's trusts, s.89 - see Disabled Person's Trust
	Bereaved minor's trusts (s.71A) and 18–25 trusts (s.71D)

The "outside" trusts escape the ten-year and exit charges because the value is taxed elsewhere - usually in a beneficiary's own estate. A Disabled Person's Trust, for instance, is broadly treated as though the disabled beneficiary owns the fund, so it avoids the periodic charges entirely.

The three charges at a glance#

Charge	When it arises	What triggers it	Rate	Authority
Entry charge	On creation or a later addition	A chargeable lifetime transfer (CLT) into the trust	20% on value above the settlor's available NRB	IHTA 1984, ss.2, 7
Ten-year (principal) charge	Every tenth anniversary of creation	Relevant property held on the anniversary	Max 6% (effective rate × 30%)	IHTA 1984, ss.64, 66
Exit (proportionate) charge	Between anniversaries	Property ceases to be relevant property (e.g. an appointment out)	Fraction of the ten-year / settlement rate (× n/40)	IHTA 1984, ss.65, 68–69

The rest of this page works through each in turn. Throughout, the nil-rate band (The Nil-Rate Band & Transferable Nil-Rate Band) is £325,000, frozen at that level until 5 April 2031.

Charge 1 - the entry charge#

A gift into a relevant property trust during the settlor's lifetime is a chargeable lifetime transfer (CLT), not a potentially exempt transfer. If the value transferred exceeds the settlor's available nil-rate band, the excess is taxed immediately at the lifetime rate of 20% - half the 40% death rate (IHTA 1984, s.7).

"Available" is the key word. The settlor's NRB is reduced by any chargeable transfers made in the seven years before this one (cumulation). So a settlor who has already used part of their band brings less of it to the new trust.

Worked example - entry charge. In June 2026 a settlor puts £500,000 into a discretionary trust. She has made no chargeable transfers in the previous seven years, so the full £325,000 NRB is available.

• Value transferred: £500,000
• Less available NRB: −£325,000
• Chargeable excess: £175,000
• Entry charge at 20%: £35,000 (if the trustees bear the tax from the fund)

If the settlor pays the tax instead, the payment is itself a further loss to her estate, so the figure must be grossed up - the effective rate on the excess becomes 25% (20 ÷ 80), giving £43,750. Had she made a £125,000 CLT three years earlier, her available band would fall to £200,000 and the charge would be 20% × (£500,000 − £200,000) = £60,000.

A gift into trust on death is charged at the full death rate as part of the estate, not at 20%. And a nil-rate-band discretionary will trust is deliberately funded within the NRB, so no entry charge arises at all.

Charge 2 - the ten-year (principal) charge#

On every tenth anniversary of the trust's creation, HMRC values the relevant property and levies a periodic charge (IHTA 1984, s.64). The maximum rate is 6%, but most trusts pay far less. The rate is built by a notional-transfer method (s.66):

1. Value the relevant property in the trust on the anniversary.
2. Build the notional chargeable transfer: that value, plus the initial value of any related settlements and same-day additions (see below), treated as a transfer made on top of the settlor's chargeable transfers in the seven years before the trust began.
3. Deduct the available NRB (£325,000, reduced by that cumulative history and by any amounts on which an exit charge fell in the previous ten years).
4. Notional tax = 20% of the balance.
5. Effective rate = notional tax ÷ value of the relevant property.
6. Actual rate = effective rate × 30%.
7. Ten-year charge = actual rate × value of the relevant property.

Step 6 is why the headline maximum is 6%. If the whole fund sits above the NRB with no band available, the effective rate is the full 20%; 20% × 30% = 6%. In practice the NRB carves out a slice tax-free and the effective rate is lower, so the actual rate lands well under 6%.

Worked example - ten-year charge. The trust above reaches its first ten-year anniversary in June 2036. The relevant property is now worth £600,000. There were no related settlements, no same-day additions, no exits in the last ten years, and no prior chargeable transfers by the settlor. The NRB is still £325,000.

• Notional transfer: £600,000
• Less available NRB: −£325,000
• Chargeable balance: £275,000
• Notional tax at 20%: £55,000
• Effective rate: £55,000 ÷ £600,000 = 9.1667%
• Actual rate: 9.1667% × 30% = 2.75%
• Ten-year charge: £600,000 × 2.75% = £16,500

That is 2.75% of the fund for ten years of trust - comfortably below the 6% ceiling, precisely because the first £325,000 escaped the notional tax.

Charge 3 - the exit (proportionate) charge#

When relevant property leaves the trust between anniversaries - a capital appointment to a beneficiary, for example - an exit charge applies to the amount leaving (IHTA 1984, s.65). It is called proportionate because it charges only the fraction of a ten-year period that has actually run, measured in complete quarters (three-month periods) since the last anniversary: the rate is multiplied by n/40, where n is the number of complete quarters.

Between anniversaries (s.69). The rate is taken from the last ten-year charge - the actual rate worked out on the previous anniversary - and scaled by n/40.

Worked example - exit charge between anniversaries. Two years after that ten-year anniversary, the trustees appoint £100,000 out to a beneficiary. Two years is 8 complete quarters.

• Rate from the last ten-year charge: 2.75%
• Time fraction: 8 ÷ 40 = 0.2
• Exit charge: £100,000 × 2.75% × 0.2 = £550

Before the first ten-year anniversary (s.68). There is no previous charge to borrow from, so HMRC constructs a settlement rate: it runs a hypothetical ten-year calculation on the property's initial value, using the settlor's cumulative history and the NRB in force at the date of exit, arrives at an effective rate, multiplies by 30%, and then scales that by n/40 (quarters since the trust began). If the trust was funded within the NRB - as an NRB discretionary trust usually is - the settlement rate is nil and the early exit charge is zero. This is why appointments out of a properly-funded NRB discretionary trust in its first decade are so often tax-free.

The trust's own nil-rate band#

Every relevant property trust has, in effect, its own nil-rate band running through these calculations - but it is not a fresh, standalone £325,000. It is the settlor's NRB as it stood when the trust began, cut down by:

• the settlor's chargeable transfers in the seven years before the trust was created (cumulation), and
• any capital that left the trust in the previous ten years and bore an exit charge.

So a settlor who spreads assets across their history reduces the band available to each trust. Two rules police attempts to multiply the band:

Related settlements (s.62)#

Settlements created by the same settlor on the same day are "related." The initial value of a related settlement is added into the notional transfer when computing the effective rate - so related settlements share, rather than each duplicate, the benefit of the NRB.

Same-day additions and the end of "Rysaffe" planning#

For years, advisers used the decision in Rysaffe Trustee Co (CI) Ltd v IRC [2003] to set up several small pilot trusts on different days, then fund them together later (often on death via the will). Because the trusts were created on different days they were not related settlements, and each claimed a full nil-rate band - slicing a large fund into several sub-£325,000 pots that each paid little or no periodic charge.

The Finance (No.2) Act 2015 same-day addition rules (IHTA 1984, ss.62A–62C) closed this down. Where a settlor adds property to more than one settlement on the same day, the value added to the other settlements is brought into account in each trust's calculation. Funding several pilot trusts on the same day - the whole point of the plan when the additions came on death - no longer multiplies the band. Trusts genuinely created and funded on different days can still each hold their own band, but the same-day route is effectively dead.

Interaction with the residence nil-rate band#

The relevant property regime also explains a trap professionals must watch: a discretionary trust usually forfeits the The Residence Nil-Rate Band (RNRB). The RNRB - up to £175,000 - is only available where a home is "closely inherited", meaning it passes to direct descendants either outright or through a qualifying trust: an IPDI, a bereaved minor's trust, an 18–25 trust, or a disabled person's trust.

A standard discretionary will trust does not qualify, because no descendant takes a qualifying interest in the property. So leaving the family home into a discretionary trust generally loses the RNRB for the whole estate - potentially £175,000 (or £350,000 for a couple) of allowance. Where preserving the RNRB matters, an Interest in Possession (IIP) or flexible life-interest structure for the home is often the better route. (The RNRB also tapers away by £1 for every £2 by which the estate exceeds £2 million.)

Reporting: the IHT100#

Trustees, not HMRC, must report and pay. Chargeable events under the regime are reported on form IHT100 with the relevant event schedule - the ten-year (principal) charge and the exit charge each have their own schedule - and any tax is due within six months of the end of the month in which the event falls. Interest runs on late payment.

Not every event needs a return. Under the excepted settlement rules, no account is required where the trust's value is modest and no tax is due - broadly, where the notional chargeable transfer does not exceed 80% of the NRB (£260,000) and there is no tax to pay. Keep good records of the settlor's cumulation and of every exit: the numbers you need on the next anniversary depend on the history you logged on this one.

Key points to carry away#

• Relevant property = settled property with no qualifying interest in possession. Chiefly discretionary trusts, and almost all lifetime trusts created on/after 22 March 2006.
• Three charges: a 20% entry charge above the available NRB; a ten-year charge of up to 6%; and exit charges scaled by complete quarters (n/40).
• The 6% ceiling comes from 20% × 30%; the NRB almost always pulls the real rate below it.
• The trust's NRB is the settlor's, diluted by seven-year cumulation, prior exits, related settlements and same-day additions - the last of which ended pilot-trust multiplication in 2015.
• A discretionary trust usually costs the estate its RNRB.
• Report on IHT100 and pay within six months.

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This page is general information for professionals, not legal or tax advice. Thresholds, rates and reliefs change - the nil-rate band is frozen at £325,000 only until 5 April 2031 - so confirm the current position and the specific facts before advising or acting.