Lifetime Trusts and the 10-Year IHT Charge Explained

Lifetime Trusts and the 10-Year IHT Charge: What Families Need to Know

Putting your family home into a lifetime discretionary trust rarely delivers the tax savings or care fee protection that marketing materials suggest. In many cases, families discover years later that they face ongoing inheritance tax charges, lost allowances, and administrative costs that leave their children worse off than a straightforward will would have done.

Why People Set Up Lifetime Trusts

The usual motivation is fear. Fear that care home fees will consume the family home, or that inheritance tax will take a large slice of what parents want to pass on. These are understandable concerns, and the marketing around lifetime trusts often speaks directly to them.

You may have seen adverts for seminars on estate planning or asset protection. Some firms conduct home visits, offering packages costing several thousand pounds that promise to shield your home from care costs and reduce your inheritance tax bill. The trusts created are usually discretionary trusts, sometimes called family protection trusts or asset protection trusts.

The pitch sounds appealing: transfer your home into a trust now, and it will be safe from means testing and outside your estate for inheritance tax purposes. Unfortunately, the reality is often quite different.

Care Fees and the Deliberate Deprivation Rule

Local authorities in England assess whether someone can pay towards their care costs by looking at their capital, including property. The Care Act 2014 gives councils the power to treat assets as if a person still owns them if the main purpose of giving those assets away was to avoid paying for care. Scotland and Wales have similar rules under their own legislation.

This is called deliberate deprivation of assets. It does not matter that the property is legally held in a trust. If the council decides the transfer was motivated by avoiding care contributions, they can assess the person as though the home were still theirs.

Councils look at timing, the person's health at the time of the transfer, and whether they had any reasonable expectation of needing care. A transfer made decades before any care need arose may be viewed differently from one made when health was already declining, but there is no fixed time limit. The assessment depends on the circumstances.

This means the core promise of many asset protection trusts, that your home will be safe from care fees, may not hold up when tested.

Inheritance Tax Charges You May Not Expect

Lifetime gifts into discretionary trusts can trigger inheritance tax charges at several points. Families often discover these costs only after many years.

• Entry charge: When you transfer assets into a discretionary trust and the value exceeds the nil-rate band, there may be an immediate inheritance tax charge at a lifetime rate. For current thresholds and rates, see the GOV.UK guidance on inheritance tax. Most family homes are worth considerably more than the nil-rate band, so this charge can apply from the outset.
• Ten-year periodic charge: Every ten years from the date the trust was created, HMRC assesses the trust for inheritance tax. The charge can be up to 6% of the value above the nil-rate band. This is often the first point at which families realise something has gone wrong, when a tax bill arrives a decade after the trust was set up.
• Exit charge: When assets leave the trust and pass to beneficiaries, there may be a further inheritance tax charge. The amount depends on how long the assets have been in the trust and when the last ten-year charge was paid.

These charges can add up over time. A trust that was supposed to reduce inheritance tax may end up producing a larger combined bill than leaving the property in the estate and passing it through a will.

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Other Tax Costs and Lost Allowances

Inheritance tax is not the only consideration. Putting a home into a lifetime trust can create problems with capital gains tax, income tax, and valuable inheritance tax reliefs.

Capital gains tax on transfer: When you transfer a property into a trust, this counts as a disposal for capital gains tax purposes. If the property has increased in value since you bought it and is not your main residence at the time, you may face a capital gains tax bill. Principal private residence relief, which normally exempts your main home from CGT, is more restricted once property is held inside a trust.

Loss of the residence nil-rate band: Since 2017, there has been an additional inheritance tax allowance available when a home passes to direct descendants such as children or grandchildren. This residence nil-rate band can significantly increase the amount that passes tax free. However, property held inside a discretionary trust will typically not qualify. This means families lose an allowance that would otherwise have applied, increasing the eventual tax bill.

Income tax on trust income: If the trust receives rental income or other taxable income, it is taxed at the trust rate, which is higher than the basic rate individuals pay. Current trust income tax rates are published on GOV.UK. Holding a rental property inside a trust is usually less tax efficient than owning it personally.

Administration and Ongoing Costs

A discretionary trust requires proper administration for as long as it exists. This is not a one-off task.

Trustees are usually the children or other family members. They are responsible for keeping trust accounts, filing tax returns, and meeting HMRC reporting requirements. The IHT100 form is required for ten-year charges and exit charges. Many trustees need professional help to complete these returns correctly, and that means ongoing fees for accountants or solicitors.

Trustee duties are legal obligations. Getting them wrong can result in personal liability. The administrative burden often falls on the very people the trust was supposed to benefit, and it continues for decades.

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

When Trusts May Be Genuinely Useful

None of this means that trusts are always a poor choice. There are circumstances where a properly structured trust serves a real purpose.

• Vulnerable beneficiaries: A trust can protect assets for a family member who cannot manage money themselves, whether due to disability, mental health difficulties, or age.
• Protective trusts after divorce: Trusts can help ensure assets remain available for children rather than becoming subject to a future divorce settlement.
• Business succession: Trusts are sometimes used to manage the transfer of business interests across generations in a controlled way.
• Genuine non-tax reasons: Where the primary motivation is something other than avoiding tax or care fees, and the benefits outweigh the costs, a trust may be appropriate.

The key distinction is between trusts created for genuine reasons with proper professional advice, and trusts sold primarily on the promise of tax savings or care fee avoidance that may not materialise.

Getting the Right Advice

Before putting your home or other valuable assets into a trust, speak to a solicitor or tax adviser who is qualified to advise on trusts and estates. Look for STEP membership, which indicates specialist training in trust and estate planning. Chartered tax advisers can also help assess the tax consequences.

Be cautious about seminar-based sales operations that present trusts as a simple solution. Ask direct questions about the ten-year charge, the residence nil-rate band, and what happens if you need care. If the answers are vague or dismissive, that is a warning sign.

For many families, a straightforward will achieves better results than a lifetime transfer. Some families may benefit from a trust that only comes into effect on death. Keeping the home in your own name preserves principal private residence relief for CGT, maintains eligibility for the residence nil-rate band, and avoids the periodic charges that apply to discretionary trusts.

GOV.UK provides current information on inheritance tax thresholds, rates, and reporting requirements. The Society of Trust and Estate Practitioners has a directory of qualified advisers. Citizens Advice can help with questions about local authority care assessments and the deliberate deprivation rule.

Frequently Asked Questions

Does putting my home in a trust protect it from care home fees?

Usually not. If the local authority decides the transfer was made to avoid paying for care, they can assess you as though you still own the property under deliberate deprivation rules.

What is the ten-year charge on a discretionary trust?

Every ten years, HMRC assesses the trust for inheritance tax on the value above the nil-rate band. The charge can be up to 6% of that excess value. Current rates are published on GOV.UK.

Will I lose the residence nil-rate band if my home is in a trust?

In most cases, yes. The residence nil-rate band generally applies when a home passes directly to descendants, and property held in a discretionary trust will typically not qualify.

How do I find a qualified adviser for trust planning?

Look for a solicitor or adviser with STEP membership or a chartered tax adviser with experience in estates. The STEP website has a searchable directory of members.

The Next Step

Now that you have read through the advice above, you might want to put it into practice. Our HMRC Red Flag Checker lets you find out which areas of your finances HMRC is most likely to query, what you should be declaring, and roughly what you may owe. Try it now →