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What is a transfer into trust?

The person who puts assets into a trust is known as a 'settlor'. A transfer of assets into a trust can include buildings, land or money and can be either of the following:

• a gift made during a person's life
  
• a transfer or transaction that reduces the value of the settlor's estate (for example an asset is sold to trustees at less than its market value) - the loss to the person's estate is considered a gift or transfer
  

Working out if Inheritance Tax is due

For most types of trust Inheritance Tax is due when you make transfers that total more than the Inheritance Tax threshold (£325,000 in 2012-13 tax year). You work this out by adding up the value of any transfers (based on the loss in value to the settlor's estate) and any chargeable gifts made in the previous seven years by the settlor. Inheritance Tax is due on everything above the threshold.

If the trustees pay, the rate of tax is 20 per cent. If the settlor pays the Inheritance Tax instead of the trustee, this means there will be an increased loss from the settlor's estate. The amount of tax due will therefore increase. These calculations are complex.

How you pay your Inheritance Tax

If Inheritance Tax is due on your transfer into a trust you'll need to fill in the following forms:

• IHT100 - 'Inheritance Tax account'
• IHT100a - 'Gifts and other transfers of value'.

• Completing form IHT100 Inheritance Tax Account

• Paying Inheritance Tax

• Form IHT100 Opens new window

• Form IHT100a Opens new window

Death within seven years of making a transfer

If you die within seven years of making a transfer into a trust your estate will have to pay Inheritance Tax at the full amount of 40 per cent. This is instead of the reduced amount of 20 per cent which is payable when the payment is made during your lifetime.

In this case your personal representative - who manages your estate when you die - will have to pay a further 20 per cent out of your estate based on the value of the original transfer.

If no Inheritance Tax was due when you made the transfer, the value of the transfer is added to your estate when working out whether any Inheritance Tax is due.

• Inheritance Tax and trusts following a death

• How to value the estate of someone who has died Opens new window

If you continue to benefit from a gift in a trust

If you make a gift into any type of trust but continue to benefit from the gift - for example, you give away your house but continue to live in it - you will pay 20 per cent on the transfer and the gift will still count as part of your estate. These are known as gifts 'with reservation of benefit' - find out more by following the link to 'Passing on your home to your children' below.

This creates a situation where there are two possible Inheritance Tax charges if you die:

• a charge when you transfer the gift into a trust
  
• a charge to your estate when you die - because the asset is still considered part of your estate
  

To avoid double taxation, only the higher of these charges is applied - in other words you won't ever pay more than 40 per cent Inheritance Tax.

• Passing on your home to your children Opens new window

Gifts into a trust for someone who is disabled

You don't have to pay Inheritance Tax immediately if you make a gift to a trust for someone who is disabled.

Remember though that Inheritance Tax may still be due when you die - see the sections above.

Find out more about how Inheritance Tax applies to trusts for someone who is disabled in the guide below.

• Trusts that do and don't pay Inheritance Tax

More useful links

• Inheritance Tax when passing on money or property

• Form IHT100 Inheritance Tax Account, guidance and supplementary pages Opens new window

Useful contacts

• Contact HMRC Trusts & Estates