I had a Solicitor call me recently to clarify how the 10-year and exit charges actually work on Trusts.
It reminded me how complex this area of inheritance tax can be — even for professionals.
So, if you’ve set up a family Trust, or you’re a Trustee looking after one, here’s a simple breakdown of what these charges mean and when they apply.
In this video, I walk through how inheritance tax affects trusts every ten years, and what trustees need to know about exit charges and special cases
What the 10-Year Charge Is
Every ten years after a Trust is created, it may face what’s known as a periodic charge — often called the 10-year charge.
It’s an inheritance tax charge that applies to certain types of Trusts known as “relevant property Trusts.”
These usually include:
- Discretionary Trusts
- Some interest-in-possession Trusts
The 10-year charge is worked out on the value of the Trust’s assets at that anniversary.
The maximum rate is 6%, but the actual rate is often lower depending on how much of the £325,000 nil-rate band is available.
If a Trust holds property, the value is based on the market value at that time — not the original cost.
How It’s Calculated
In simple terms, the calculation looks like this:
- Value the assets held by the Trust at the 10-year mark.
- Deduct any debts, mortgages or costs that reduce the total value.
- Subtract the nil-rate band (£325,000 for 2025/26).
- Apply the effective rate (up to 6%) on the remainder.
Example
A Discretionary Trust holds a rental property worth £500,000.
After deducting the nil-rate band, £175,000 is taxable.
At 6%, the maximum IHT due would be £10,500 — although in practice it’s usually lower.
Exit Charges Explained
When assets leave the Trust — for example, when money or property is passed to a beneficiary — there may be an exit charge.
This happens even if it’s not on the 10-year mark.
The exit charge is based on:
- How long it’s been since the last 10-year charge (or since the Trust started), and
- The effective rate that applied at that point.
If assets are distributed soon after a 10-year charge, the exit charge is usually small.
But if several years have passed, it can add up.
Example
A £250,000 property is transferred out of a Trust five years after the 10-year charge.
A small percentage of inheritance tax may apply — often less than 1%.
Trusts for 18–25 Year-Olds
These Trusts are often used when parents or grandparents want to give funds to young adults but not hand over full control straight away.
An 18–25 Trust allows the Trustees to hold assets until the beneficiary turns 25.
If the young person becomes fully entitled before 25, there’s no 10-year charge.
However, if money is paid out between ages 18 and 25, there can be an exit charge — usually much smaller than the normal Trust charge.
Example
A Trust worth £200,000 pays funds to a beneficiary at 22.
Because the payment is made before 25, a small exit charge might apply, but it’s nowhere near the full 6%.
Trusts for Disabled Beneficiaries
Trusts for disabled people are treated differently.
They’re designed to protect vulnerable individuals and make sure their financial needs are met.
If the Trust qualifies as a disabled person’s Trust (under section 89 of the Inheritance Tax Act 1984), it’s exempt from 10-year and exit charges.
To qualify:
- The main beneficiary must receive certain disability benefits, or
- Be incapable of managing their own affairs because of mental impairment.
However, if the Trust is partly discretionary (benefiting both a disabled person and others), the charge may apply to the non-disabled portion.
Trustees should keep medical evidence and clear records to prove eligibility.
Practical Tips for Trustees
- Keep copies of the Trust deed and note the exact creation date.
- Value assets properly before each 10-year anniversary.
- Keep a running record of distributions — it helps when exit charges arise.
- Remember, each Settlor (the person creating the Trust) has one nil-rate band. If they’ve set up multiple Trusts, it’s shared between them.
- Always get advice before transferring property or large sums — a small calculation error can cost thousands later.
Key Takeaway
These charges aren’t penalties — they’re part of how the inheritance tax system keeps Trust wealth in line with personal estates.
The problem is that they’re often misunderstood, and many Trustees don’t realise a charge is due until it’s too late.
If you’re unsure whether your Trust will face a 10-year or exit charge, or you’re planning to distribute assets soon, it’s worth getting the numbers checked.
You can book a Trust and Property Tax Review with us at Grace Certified Accountants — we’ll help you understand what applies to your situation and what can be done to minimise future costs.
Related reading:
- Using Trusts to Manage Property Tax – What You Need to Know
- Should You Put Your Property in a Trust? (UK Guide for Landlords and Homeowners)
External Link:
HMRC Trusts and Estates Manual