The Discretionary Trust 10-Year Periodic Charge: How It Works, How It Is Calculated, and Why It Still Saves Tax

Introduction

For trustees of discretionary trusts and settlors navigating UK estate planning, the 10-year periodic charge represents one of the most misunderstood—yet potentially manageable—costs of trust ownership. Commonly described as a "tax on holding assets in trust," the periodic charge is fundamentally a mechanism by which HMRC ensures that large concentrations of wealth in discretionary trusts do not escape inheritance tax (IHT) indefinitely.

Yet despite its fearsome reputation, the periodic charge remains a powerful tax-planning tool. Many trustees and settlors are surprised to learn that, even after accounting for this charge, discretionary trusts can continue to deliver substantial tax savings compared to direct estate ownership. Understanding how the periodic charge works—and critically, how it is calculated—is essential for informed trust administration and long-term wealth planning.

This article explains the mechanics of the 10-year periodic charge, walks through detailed calculations with worked examples, explores why trusts remain tax-efficient despite this charge, and provides practical guidance for trustees approaching the 10-year anniversary and settlors considering trust structures.

What Is the 10-Year Periodic Charge?

The 10-year periodic charge is a one-time inheritance tax charge levied on the assets held within a discretionary trust at each 10-year anniversary of the trust's creation [1]. It is the price of holding assets in trust beyond the initial 10-year period without distributing them to beneficiaries or moving them to a different trust structure.

Historical Context

The periodic charge was introduced as part of the inheritance tax regime reforms in 1986. Before that date, discretionary trusts could hold assets indefinitely without triggering inheritance tax charges—a significant tax-planning advantage. The introduction of the periodic charge was designed to prevent indefinite wealth preservation in trusts and ensure that IHT applied proportionately to trust assets over time.

However, the charge was deliberately set below the standard IHT rate. Rather than applying the full 40% IHT rate, the periodic charge applies at 30% of the lifetime rate, which equals 6% of the trust's value at each 10-year anniversary [2]. This discount reflects a policy choice to preserve the trust as a useful planning tool while ensuring some tax cost.

When Does the Charge Apply?

The periodic charge applies automatically at:

• The 10th anniversary of the trust's creation
• Every 10 years thereafter (the 20th anniversary, 30th anniversary, and so on)

For example, a trust created on 1 January 2015 will face its first periodic charge on 31 December 2024 (the 10th anniversary). The next periodic charge will arise on 31 December 2034, and so on.

The charge applies to the net value of trust assets at each anniversary, less certain deductions (discussed below).

How the Periodic Charge Is Calculated: The Nil-Rate Band Framework

The calculation of the periodic charge is not straightforward. It does not simply apply 6% to all trust assets. Instead, HMRC uses a sophisticated system that references the nil-rate band (NRB)—the same threshold used in estate duty calculations for deceased individuals.

The Nil-Rate Band

The nil-rate band is the amount of estate that can pass free of IHT. For the 2025–26 tax year, the nil-rate band is £325,000 [3]. This figure is frozen and has not increased since April 2009, despite inflation.

The NRB is a critical reference point in periodic charge calculations because it determines how much of a trust's assets can be taxed at the reduced periodic charge rate versus a higher rate.

The Effective Tax Rate: 6% on the Amount Above the NRB

The periodic charge applies as follows:

1. Identify the trust's assets at the 10-year anniversary (gross value, including any loans or charges secured on trust property).
2. Deduct liabilities (mortgages, trust debts, and costs of the charge itself, usually estimated at 0.5% of assets).
3. Compare the net value to the nil-rate band available to the trust.

Here is the critical rule: If the trust's value is less than the nil-rate band, no periodic charge is due. If the trust's value exceeds the nil-rate band, the periodic charge is 6% of the excess only.

Why "Available to the Trust"?

The phrase "nil-rate band available to the trust" is crucial because it incorporates two major concepts:

1. Cumulation with chargeable lifetime transfers (CLTs)

When a settlor creates a trust, they make a chargeable lifetime transfer (CLT). The value of that initial transfer uses up the settlor's nil-rate band (or potentially applies lifetime tax at 20% if it exceeds the NRB). At the 10-year anniversary, HMRC looks back at whether the settlor made any CLTs in the 7 years before creating the trust. If they did, the nil-rate band available to the trust is reduced proportionately.

For example:

• A settlor with a £325,000 NRB makes a CLT of £100,000 in Year 1.
• In Year 8, the same settlor creates a discretionary trust with £500,000.
• The trust's first available NRB is reduced: £325,000 − £100,000 = £225,000.
• At the 10-year anniversary (Year 18), the NRB available is still £225,000 (assuming no further CLTs).
• Periodic charge = 6% × (£500,000 − £225,000) = 6% × £275,000 = £16,500.

2. The Rysaffe principle and same-day addition rules

The second key rule involves multiple trusts created by the same settlor. Under the Rysaffe principle (derived from IRC v Rysaffe Investments Ltd [1985]), if a settlor creates or adds to multiple trusts on the same day, those additions are aggregated for nil-rate band purposes [4]. The nil-rate band is then apportioned among the trusts proportionally.

Example:

• A settlor creates two trusts on the same day, each with £400,000.
• Total additions = £800,000.
• Available NRB = £325,000.
• Proportional NRB per trust = (£400,000 / £800,000) × £325,000 = £162,500 per trust.
• At the 10-year anniversary, each trust has a charge of 6% × (£400,000 − £162,500) = 6% × £237,500 = £14,250 per trust.

The Finance Act 2015 introduced modifications to the Rysaffe principle, known as the same-day addition rules. These rules generally prevent settlors from creating multiple trusts on the same day specifically to fragment their nil-rate band across many trusts. However, trusts created on different days are treated separately [4].

Worked Example: A £800,000 Trust at the 10-Year Anniversary

To illustrate, consider a practical scenario:

Scenario:

• A discretionary trust is created on 1 January 2015 with an initial gift of £800,000.
• No further gifts are made to the trust.
• The settlor had made no chargeable lifetime transfers in the 7 years before creation.
• At the 10-year anniversary (31 December 2024), the trust assets are valued at £800,000 (no growth or erosion).
• Trust liabilities (legal fees, valuation costs) total approximately £4,000 (estimated at 0.5% of assets).

Calculation:

Item	Amount
Gross trust assets at 10-year anniversary	£800,000
Less: Trust liabilities and costs	(£4,000)
Net trust value	£796,000
Nil-rate band available (2024–25)	£325,000
Amount subject to periodic charge	£796,000 − £325,000 = £471,000
Periodic charge @ 6%	£471,000 × 6% = £28,260

Impact:

• The periodic charge is £28,260.
• This reduces the trust's assets to £767,740 (after the charge is paid).
• Expressed as a percentage of the initial gift, the periodic charge is 28,260 / 800,000 = 3.53% over 10 years, or approximately 0.35% per annum.

Exit Charges: The Proportionate Charge Between Anniversaries

Between the 10-year anniversaries, when assets leave a trust (either distributed to a beneficiary or moved to another trust structure), an exit charge may apply. The exit charge is calculated proportionately to the periodic charge.

How Exit Charges Work

The exit charge applies when:

• A beneficiary receives a distribution from the trust.
• Assets are moved to a different trust or converted to a different structure.
• A beneficiary's interest is appointed or terminated.

The exit charge is calculated as:

Exit Charge = Periodic Charge Rate × (Years Since Last Anniversary / 10) × Value of Assets Leaving

Where Periodic Charge Rate is the effective rate calculated at the last 10-year anniversary.

Practical Example

Returning to the £800,000 trust with a periodic charge of £28,260:

The periodic charge rate = £28,260 / £800,000 = 3.53% (or 0.353% per annum).

Assume that in Year 12 (2 years after the first 10-year anniversary), the trustee distributes £100,000 to a beneficiary.

Exit charge = 3.53% × (2 / 10) × £100,000 = 3.53% × 0.2 × £100,000 = £706.

The beneficiary receives £99,294 (£100,000 − £706 exit charge), and HMRC receives £706.

If all assets were distributed in Year 15 (5 years into the next 10-year cycle), the accumulated exit charges would approach the periodic charge due at the next anniversary.

Why Discretionary Trusts Still Save Tax: The Comparison with Direct Ownership

Despite the periodic charge, discretionary trusts remain powerful tax-planning vehicles. The key is understanding the comparison with direct estate ownership.

The Direct Ownership Model: 40% IHT

If an individual holds £800,000 of assets in their personal estate and dies, those assets are subject to IHT at 40% (above the personal nil-rate band of £325,000). The IHT liability on direct death would be:

IHT on direct estate = (£800,000 − £325,000) × 40% = £475,000 × 40% = £190,000.

This is a one-time charge at death.

The Trust Model: 6% at 10-Year Intervals

In contrast, the same £800,000 held in a discretionary trust faces periodic charges of 6% every 10 years (on the amount above the NRB). Over a 30-year period:

Anniversary	Trust Value (assumed static)	Periodic Charge @ 6% on excess NRB
Year 10	£800,000	£28,260
Year 20	£800,000	£28,260
Year 30	£800,000	£28,260
Total over 30 years		£84,780

Plus exit charges on distributions (which are proportionate and typically modest).

Long-Term Comparison

If the trust survives 30 years or longer, the total IHT cost is substantially less than the direct ownership model:

• Direct estate at death: £190,000 (one-time hit).
• Trust over 30 years: ~£85,000–£100,000 (including modest exit charges).
• Savings: ~£90,000–£105,000 over 30 years.

Critically, the trust assets remain under the trustee's control and can be invested flexibly. Discretionary trusts also offer benefits beyond tax: asset protection (if beneficiaries face litigation or insolvency), creditor protection, and flexibility in distribution without the rigidity of fixed entitlements.

Exit Charges: When Do They Apply, and How Are They Calculated?

Exit charges arise whenever funds leave a trust between 10-year anniversaries. They ensure that beneficiaries cannot circumvent the periodic charge by withdrawing assets just before an anniversary.

Timing and Scope

Exit charges apply to:

1. Distributions to beneficiaries: Any payment to a beneficiary (whether discretionary or from the trustee's power to pay out).
2. Inter-trust transfers: Moving assets from one trust to another.
3. Termination of beneficial interests: When a beneficiary's interest in the trust ends (e.g., if they reach an age at which their interest terminates).

Exit charges do not apply to:

• Income distributions (only capital).
• Distributions of gains accrued within the trust (these are part of capital).
• Charges arising from specific trust events (e.g., beneficiary death), depending on the trust deed.

The Proportionality Formula

The exit charge is:

Exit Charge = (Exit Charge Percentage) × (Proportion of Lifetime) × (Value Leaving)

Where:

• Exit Charge Percentage = The periodic charge rate calculated at the last 10-year anniversary.
• Proportion of Lifetime = Number of complete quarters since the last anniversary / 40 (i.e., 40 quarters in a 10-year period).
• Value Leaving = The net value of assets being distributed.

Worked Example: Exit Charge Calculation

Returning to our £800,000 trust with a periodic charge of £28,260 and an exit charge percentage of 3.53%:

In Year 13 (3 years after the first anniversary), the trustee distributes £200,000.

• Proportion of lifetime = 12 quarters / 40 = 0.3 (or 30%).
• Exit charge = 3.53% × 0.3 × £200,000 = £2,118.

The beneficiary receives £197,882.

If no further distributions occur, at the second 10-year anniversary (Year 20), the remaining assets (£800,000 − £200,000 − £2,118 = £597,882) would face a new periodic charge calculation based on their value at that point.

Reporting Requirements: IHT100d and the 80% Threshold

Trustees have specific reporting obligations to HMRC when a periodic charge arises or when exit charges are incurred.

The IHT100d Form: Periodic Charge Returns

When a 10-year anniversary occurs, trustees must file an IHT100d return [5] with HMRC if the trust's value at the anniversary exceeds 80% of the nil-rate band.

For the 2025–26 tax year, this threshold is:

80% × £325,000 = £260,000.

If the trust's net value at the 10-year anniversary exceeds £260,000, the IHT100d must be filed.

The IHT100d requires:

• Details of the trust's assets and their valuations at the anniversary.
• Calculation of the periodic charge (or confirmation that none is due).
• Details of any relief (e.g., spouse exemption, charity exemption) that reduces the charge.
• Supporting valuations, particularly for non-liquid assets (property, shares, businesses).

The IHT100c Form: Exit Charge Returns

Exit charges are typically reported via an IHT100c return [5] when assets leave the trust. The form must be filed if the exit charge exceeds a nominal threshold (usually £100) or if the trust value exceeds the 80% threshold.

Professional Valuations

For trusts exceeding the 80% threshold, HMRC generally requires professional valuations of non-standard assets (land, shares in unquoted companies, chattels). Trustees must maintain documented valuations for audit purposes.

Strategies to Minimise or Defer the Periodic Charge

While the periodic charge cannot be eliminated, several legitimate strategies can reduce or defer it.

Strategy 1: Keep Below the Nil-Rate Band

The simplest approach: if a trust's value can be kept below the nil-rate band (£325,000 for 2025–26), no periodic charge is due. This is feasible for smaller trusts or trusts with regular distributions.

Strategy 2: Staged Distributions

By making distributions to beneficiaries between 10-year anniversaries, trustees reduce the trust's value at the next anniversary. Exit charges on these distributions are modest (proportionate to time elapsed and the periodic charge rate), and the reduction in the periodic charge at the next anniversary is often substantial.

Example: A £800,000 trust makes a £200,000 distribution in Year 12 (exit charge ~£2,100). At the Year 20 anniversary, the remaining £597,882 faces a periodic charge of approximately £16,290—a saving of ~£12,000 compared to holding the full £800,000.

Strategy 3: Inter-Trust Rearrangement (Planning with Care)

Some trustees consider moving assets between trusts or converting a trust to a different structure (e.g., bare trust or TOID—trust of its own deed) to reset the periodic charge clock. However, this strategy is fraught with pitfalls:

• Exit charges apply on inter-trust transfers.
• Rearrangement conditions must be met (typically, the new trust must be created for the same beneficiaries).
• HMRC scrutiny is high if rearrangements appear designed to avoid IHT.

Trustees should only consider rearrangements with professional advice and with clear non-tax rationales (e.g., simplification, governance).

Strategy 4: Gifts Out to Beneficiaries and Wills

For settlors with substantial wealth outside the trust, consider:

• Making outright gifts to beneficiaries (using annual exemption and larger gifts to create equality).
• Including bequests to beneficiaries in a personal will that bypass the trust.
• This reduces the proportion of wealth concentrating in the trust over time.

Strategy 5: Charitable Donations

If the trust has charitable objects, distributions to charity are often exempt from IHT. This can reduce the trust's value and any future periodic charge.

Frequently Asked Questions

Q1: Is the Periodic Charge a One-Time Charge, or Is It Levied Every 10 Years?

A: The periodic charge is levied every 10 years indefinitely. A trust created in 2015 faces charges in 2025, 2035, 2045, and so on. However, between anniversaries, only exit charges (proportionate charges on distributions) apply.

Q2: What If My Trust's Value Falls Below the Nil-Rate Band by Year 10—Do I Still Owe a Periodic Charge?

A: No. If the trust's net value is below the nil-rate band at the 10-year anniversary, no periodic charge is due. The charge applies only on the amount above the NRB.

Q3: Does the Periodic Charge Apply to Spouse or Charity Trusts?

A: No. Certain trusts are exempt from the periodic charge, including:

• Spouse trusts (where the surviving spouse is the primary beneficiary and has an interest in possession).
• Charity trusts (where the trust is for charitable purposes exclusively).
• Employee trusts and certain pension trusts.

A discretionary trust where the spouse is one of many beneficiaries is not exempt; it is fully subject to the periodic charge.

Q4: Can I Spread the Periodic Charge Payment Over Several Years?

A: Generally, no. The periodic charge is due within 12 months of the anniversary. However, trustees can request interest-free installments from HMRC if the trust holds qualifying land or other property, payable over up to 10 years. This is rare and requires HMRC approval.

Q5: What Happens If I Miss the Filing Deadline for the IHT100d Return?

A: HMRC can charge penalties for late filing and may assess the periodic charge based on estimated valuations. Trustees should file the IHT100d within 12 months of the anniversary to avoid penalties and disputes over valuations.

Q6: Does a Subsequent Generation (e.g., a Trust for My Children's Children) Face the Periodic Charge?

A: Yes, but it depends on the trust structure. If a discretionary trust distributes assets to beneficiaries (including children), and those beneficiaries then place the assets into their own trusts, the subsequent trusts face their own periodic charges. However, certain trust-to-trust arrangements (e.g., a bare trust continuing to an on-trust settlement) may reset the 10-year clock, subject to conditions and professional advice.

Important Caveats and Disclaimer

This article provides general information about the UK inheritance tax regime and the 10-year periodic charge applicable to discretionary trusts. It is not personal financial, tax, or legal advice.

Tax law is complex, and individual circumstances vary widely. The nil-rate band, tax rates, and reporting thresholds change annually. This article reflects the 2025–26 tax year rates and HMRC guidance as of 28 April 2026.

Trustees and settlors must:

1. Take advice from qualified tax advisors, solicitors, or trust professionals before making decisions about periodic charges, exit charges, or trust restructuring.
2. Maintain detailed records of trust valuations and transactions, as HMRC may challenge valuations or calculations.
3. File IHT100d and IHT100c returns on time to avoid penalties.
4. Be aware that anti-avoidance rules (including GAAR—General Anti-Abuse Rule) apply, and aggressive tax-planning strategies may be challenged.

The authors and publishers of this article accept no liability for decisions made based on this information. Always consult professional advisors before implementing any strategy.