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The Inheritance Tax exit charge

Inheritance Tax is charged up to a maximum of six per cent on assets - such as money, land or buildings - transferred out of a trust. This is known as an 'exit charge' and it's charged on all transfers of ‘relevant property’. Use the link below to find out more about relevant property.

• Trusts that do and don't pay Inheritance Tax

What is a transfer out of trust?

A transfer out of trust can occur when:

• the trust comes to an end
  
• some of the assets within the trust are distributed to beneficiaries
  
• a beneficiary becomes 'absolutely entitled' to enjoy an asset
  
• an asset becomes part of a ‘special trust’ (for example a charitable trust or trust for a disabled person) and it ceases to be ‘relevant property’
  
• the trustees enter into a non-commercial transaction that reduces the value of the trust fund
  

Find out more about how Inheritance Tax applies to relevant property trusts by following the link below.

• Trusts that do and don't pay Inheritance Tax

When there isn't an Inheritance Tax exit charge

There are some occasions when there is no Inheritance Tax exit charge - these apply even where the trust is a ‘relevant property’ trust. For instance, it isn’t charged:

• on payments by trustees of costs or expenses incurred on assets held as relevant property
  
• on some payments of capital to the beneficiary where Income Tax will be due
  
• when the asset is transferred out of the trust within three months of setting up a trust, or within three months following a ten-year anniversary
  
• when assets are ‘excluded property’ - foreign assets have this status if the settlor is a 'foreign domiciliary' - that is the settlor lives permanently abroad
  

Calculating the Inheritance Tax exit charge

The calculations for the Inheritance Tax exit charge are complicated. You'll need the following information before you can begin:

• the value - before any reliefs - of all the assets transferred into the trust in question, valued at the dates of transfer (find out more about reliefs by following the link below)
  
• the value of all other transfers into other trusts made by the settlor on the same day as the trust in question was set up, valued at the date they were added
  
• the value of all transfers chargeable to Inheritance Tax that the settlor made in the seven years before the trust in question was set up, valued at the date they were made
  

Once you have this information there will be a different calculation depending on whether:

• the transfer out of the trust occurs during the first ten years of a trust’s life
  
• the transfer out occurs after the first ten years
  
• the trust is an ‘18 to 25 trust’
  

You can read more about how Inheritance Tax applies to 18 to 25 trusts by following the link below.

• Business, Woodland, Heritage and Farm Relief

• 18 to 25 trusts and how to calculate the exit charge Opens new window

Doing the exit charge calculation yourself

You need to fill in form IHT100 'Inheritance Tax Account' to tell HM Revenue & Customs (HMRC) when Inheritance Tax is due on a trust. If you want to do the calculations yourself you need to enter your figures into Sections G and H on the form. You also need to complete an event form 100c for every transfer out of the trust.

You can download a worksheet and guidance notes to help you work out how much Inheritance Tax you'll need to pay on:

• transfers into trust
  
• transfers out of trust
  
• trust ten-year anniversaries
  

To calculate the exit charge, you'll need to use section B of form IHT100WS Inheritance Tax worksheet. You can get further help filling in this section of the worksheet with part B of the guide IHT113 ‘How to fill in form IHT100WS’.

• Form IHT100WS Inheritance Tax worksheet Opens new window

• Form IHT113 How to fill in form IHT100WS Opens new window

Getting HMRC to do the calculation for you

If you want HMRC to work out the exit charge for you, fill in form IHT100 'Inheritance Tax Account' leaving sections G and H blank. You also need to complete an event form 100c for every transfer out of the trust. You need to return the form to HMRC in good time for the calculation to be worked out - otherwise you may be charged a penalty.

• Completing form IHT100 Inheritance Tax Account

• Paying Inheritance Tax

• Probate and Inheritance Tax enquiries Opens new window

• Form IHT100 - Inheritance Tax Account Opens new window

More useful links

• Inheritance Tax when passing on money or property

• How to calculate the exit charge before the first ten-year anniversary Opens new window

• How to calculate the exit charge after the first ten-year anniversary Opens new window

Useful contacts

• HMRC Trusts & Estates