Lifetime Trusts and the 10-Year IHT Charge Explained

Why lifetime trusts are sold to families

Lifetime discretionary trusts are often marketed as a way to protect the family home from care fees or reduce inheritance tax. Firms sometimes call them family protection trusts or asset protection trusts. The sales pitch typically involves a seminar or home visit, followed by an offer to set up a trust for several thousand pounds.

Concerns about care fees and inheritance tax lead many to consider these arrangements. Care home fees can exceed £1,000 a week in parts of the UK, and inheritance tax takes 40% of estates above the threshold. Parents want to pass on what they have built.

The problem is that lifetime trusts often fail to deliver what the marketing suggests. In many cases, families end up worse off than if they had simply left the home through a will. Whether a trust makes sense depends entirely on individual circumstances, the type of trust used, and how it is structured.

The 10 year inheritance tax charge

When you transfer assets into a discretionary trust, you do not escape inheritance tax. You change when and how it applies.

Every ten years, the trust must be valued and may face a charge on assets above the available nil rate band. This is called the periodic charge. The maximum rate is 6% of the value exceeding the available nil rate band, though the actual amount depends on several factors. These include how long assets have been in the trust, what other chargeable transfers the settlor made, and adjustments for any previous charges.

There is also an exit charge when assets leave the trust, calculated as a proportion of the last periodic charge.

These charges apply regardless of whether anyone has died. A family home sitting in a trust for 30 years could face three separate periodic charges, each requiring a valuation, a calculation, and potentially a tax bill.

The trust must also file returns with HMRC and keep proper records. Someone has to act as trustee, which brings legal responsibilities. Professional trustees charge annual fees. Family members acting as trustees take on duties they may not fully understand.

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Care fee protection often fails

Local authorities can look back at asset transfers when assessing what you should pay towards care. If you transferred your home into a trust to avoid paying care fees, the council may treat it as if you still own it. This is called deprivation of assets.

The rules do not set a fixed time limit. What matters is whether avoiding care costs was a significant reason for the transfer. A trust set up 15 years ago might still be challenged if the motive was clearly to shelter assets from future care assessments.

Even where the trust is not challenged directly, living in a property owned by a trust can complicate care funding applications. The situation varies depending on the trust terms, who lives in the property, and local authority practice.

Your situation may be slightly different. ask a question below ↓ and our editorial team will reply with our advice.

Lost reliefs and allowances

Transferring your home into a trust can mean losing valuable inheritance tax reliefs.

The residence nil rate band gives an extra allowance when a home passes to direct descendants on death. This is generally only available if you own the property when you die. Put the home in certain types of trust and the allowance usually disappears, though some trust arrangements may still allow access to this relief depending on their structure.

If you continue living in the property after transferring it, the gift with reservation rules may apply. HMRC will treat the home as still part of your estate for inheritance tax purposes unless you pay a full market rent to the trust. This can mean you face both the ongoing trust charges and no reduction in your taxable estate.

For married couples or civil partners, assets passing between spouses are normally exempt from inheritance tax. Trusts can interfere with this and with the ability to transfer unused nil rate bands between spouses.

What to consider instead

A straightforward will, properly drafted, handles most family situations more effectively than a lifetime trust. It costs less, avoids ongoing charges, and preserves the reliefs that reduce inheritance tax on death.

If you have concerns about care fees, speak to an independent financial adviser or a solicitor who specialises in later life planning. Local Age UK branches sometimes offer guidance on this. Citizens Advice can point you toward appropriate help.

For inheritance tax planning, the options depend on your full financial picture. Gifts made during your lifetime, pension planning, and life insurance written in trust are all possibilities worth discussing with a qualified adviser. Different types of trusts serve different purposes, and what works for one family may be unsuitable for another.

Check the inheritance tax section on GOV.UK for current thresholds and rates. The figures change, and what applies to your estate depends on your circumstances.

Be cautious about any firm that contacts you unsolicited or pressures you to sign up quickly. Legitimate advisers will encourage you to take time and seek independent advice before committing to a trust that may bind your family for decades.

The Next Step

Now that you have read through the advice above, you might want to put it into practice. Our Income Tax Calculator lets you enter your salary and get a clear breakdown of your income tax, National Insurance, and take-home pay for the 2025/26 tax year. See exactly where your money goes. Try it now →