This guide is for landlords and property investors deciding whether a discretionary trust is the right home for a buy-to-let or a wider portfolio. It explains the three IHT charges with worked figures, how rental income and capital gains are taxed inside the trust, and the residence nil-rate band trap that catches people who put their own home into trust. It does not cover trusts for disabled beneficiaries or will trusts created on death, which follow different rules.
Key Takeaways
How a Discretionary Trust Works
A discretionary trust has three main roles. The settlor creates the trust and transfers property into it. The trustees legally own and manage the property. The beneficiaries are the people who may benefit from it, but they do not have a fixed right to receive anything.
This gives the trustees control over who receives income or property, and when. A letter of wishes can guide them, but it is not binding. For IHT, this flexibility can help with estate planning and asset protection, but it also brings extra tax rules, including possible charges when assets enter the trust, every 10 years, and when they leave.
How Is a Discretionary Trust Taxed in the UK?
A discretionary trust is taxed at three separate stages, and it helps to keep them apart in your mind:
- Inheritance tax (IHT) — charged on the property when it goes into the trust and while it stays there.
- Income tax — charged on any rent the property earns.
- Capital gains tax (CGT) — charged when the property is sold.
The IHT stage itself breaks down into three charges, which we cover first: the entry charge when you settle the property into the trust, the periodic charge every 10 years, and the exit charge when property is paid out to a beneficiary.
The Entry Charge (Chargeable Lifetime Transfer)
Settling property into a discretionary trust counts as a chargeable lifetime transfer, or CLT, which means it is taxed at once. Give property straight to your child instead and it is a potentially exempt transfer (PET): no IHT at all, provided you live another seven years.
The CLT charge only applies to value above your available nil-rate band. For 2026/27 that band is £325,000, reduced by any CLTs from the previous seven years. Anything above it is taxed at 20% if the trustees foot the bill. Pay the tax yourself and the rate rises to an effective 25%, because the tax then counts as a further gift and has to be grossed up. Each new CLT also starts its own seven-year clock.
Worked example: A buy-to-let settled into trust
Value of buy-to-let settled | £500,000 |
Less available nil-rate band | (£325,000) |
Chargeable amount | £175,000 |
Entry charge at 20% | £35,000 |
The trustees pay the £35,000. This assumes a full nil-rate band, no CLTs in the previous seven years, and a property gifted with no mortgage. The figures are illustrative, and your own circumstances will change the sum.
This section covers only settling property into a trust. For how lifetime transfers compare with passing it on at death, including PETs and taper relief, see our guide on lifetime transfers versus death.
The 10-Year Periodic Charge
Every 10 years, on the anniversary of the date it began, the trust is assessed for IHT on the value of the property it holds. The most you can pay is 6%, charged only on the value above the trust's available nil-rate band. It is sometimes called the principal or anniversary charge.
That band can shrink if you made chargeable lifetime transfers in the seven years before setting up the trust, or if capital was paid out during the decade. With a full band and no earlier transfers, the sum is simple.
Worked example: the 10-year charge on the same property
Say the £500,000 buy-to-let has grown to £650,000 by the anniversary.
Value of trust property at anniversary | £650,000 |
Less available nil-rate band | (£325,000) |
Chargeable amount | £325,000 |
Periodic charge at 6% | £19,500 |
The charge returns every decade, so a growing portfolio keeps paying. Illustrative figures only.
Exit Charges
When property or capital leaves the trust, the trustees usually pay a proportionate exit charge: a slice of the periodic rate based on how many complete quarters have passed since the trust started, or since the last 10-year anniversary once the first decade is over. The later in the cycle, the bigger the slice. There is no charge at all if property leaves within three months of the trust starting or of an anniversary, since no full quarter has run.
If the transfer also triggers capital gains tax, holdover relief can pass the gain to the beneficiary so it is taxed only when they sell. The catch: holdover applies only where the exit is chargeable to IHT, so not during those no-charge windows.
How Is Rental Income Taxed in a Discretionary Trust?
If a discretionary trust keeps the rent it earns, that profit is taxed at 45% once it goes over a £500 limit. Watch the catch: if the profit is even a pound above £500, the whole lot is taxed at 45%, not just the part over £500. That £500 limit is shared between all the trusts the same person has set up, but never drops below £100 per trust. The older £1,000 limit was scrapped in April 2024.
But 45% is not always the real cost. When the trustees pay the income out to someone, that person gets it with a 45% tax credit, shown on a form called an R185. If they only pay tax at the basic 20% rate, they can claim back the difference.
Worked example: rent taxed, then paid out
Rent received | £30,000 |
less running costs | (£5,000) |
Profit | £25,000 |
Tax at 45% (paid by trustees) | £11,250 |
Basic-rate person claims back 25% | (£6,250) |
Final tax cost | £5,000 |
You can't simply take mortgage interest off the rent. Instead you get a 20% credit for it, the same rule landlords face when they own a property in their own name. The claim back also only works if the trust has paid in enough tax to cover it. Figures are for illustration only.
This is where it stops being simple. Paying the income to the right person at the right time, so it lands with a family member who pays less tax instead of being stuck at 45%, is where good advice earns its keep.
How UKPA Can Help?
At UK Property Accountants we work this out as part of an inheritance tax planning session before any property goes into the trust, so you can see the income tax cost and the IHT saving side by side.
Capital Gains Tax When Trust Property Is Sold
When trustees sell trust property, Capital Gains Tax is usually charged at 24% on gains above the trust’s annual exempt amount. For most trusts, that allowance is only £1,500 in 2026/27, although it may be higher for some vulnerable beneficiary trusts and can be reduced where the same settlor has created more than one trust.
For UK residential property, trustees must report the disposal and pay any CGT due within 60 days of completion using HMRC’s UK property reporting service. Late filing or late payment can lead to penalties and interest.
Hold-Over Relief can sometimes defer the gain when assets are transferred into a trust or from a trust to a beneficiary, but it does not remove the tax. The gain is passed on by reducing the recipient’s base cost, so CGT may arise when they later sell. Relief may be restricted if the settlor, or their spouse or civil partner, can benefit from the trust, so the trust deed should be checked before making any transfer.
The Residence Nil-Rate Band Trap
The residence nil-rate band can add up to £175,000 to the standard £325,000 inheritance tax threshold. It usually applies when a qualifying home passes to children, grandchildren or other direct descendants.
A discretionary trust can block this relief. Because trustees decide who benefits, HMRC will not normally treat the descendants as inheriting the home outright. That means the estate may lose up to £175,000 of extra inheritance tax allowance.
At the 40% death rate, losing a £175,000 allowance can mean up to £70,000 of extra inheritance tax. This is why putting the family home into a discretionary trust can be costly. Buy-to-let and investment properties do not qualify for the residence nil-rate band anyway, so they do not create this particular problem.
Is a Discretionary Trust the Right Structure for Your Property Portfolio?
Landlords often compare three options: a discretionary trust, a buy-to-let limited company, and a family investment company. A discretionary trust can help keep assets under trustee control and away from beneficiaries until the right time, but it is not usually the lowest-tax route. Trust rental income is commonly taxed at 45% above the trust’s small tax-free amount, while trust gains are usually taxed at 24% after a limited annual exemption.
A company or FIC can be more efficient for rental profits because profits are taxed under corporation tax rules, currently 19% to 25% depending on profit levels. Companies can also deduct finance costs under corporation tax principles, but extracting money through dividends, salary or repayment planning can create a second tax charge.
For inheritance tax, the trust may move assets outside the settlor’s estate, but it can trigger a 20% lifetime IHT charge above the available nil-rate band, plus 10-year and exit charges. A company or FIC does not have those periodic trust charges, but the value of shares or loans may still sit in the founder’s estate unless properly gifted or structured. The right choice depends on your priorities: tax efficiency, control, income access, asset protection and succession planning.
Settling UK Property into a Discretionary Trust: Practical Steps
Two final checks: get lender consent before transferring mortgaged property, and keep clear valuation records for trust entry, 10-year charges and exits. A professional valuation is often sensible because HMRC may review the figures.
Frequently Asked Questions
The trust usually continues. The trustees keep managing the property under the trust deed. If the settlor dies within seven years of putting assets into the trust, extra inheritance tax may be due on that earlier transfer. The trust can still face 10-year and exit charges after the settlor’s death.
Yes, but it is not a simple tax-free transfer. It is usually a chargeable lifetime transfer for inheritance tax. CGT may also arise, although Hold-Over Relief can sometimes defer the gain. If there is a mortgage, SDLT may be due on the debt taken over by the trustees, and lender consent will usually be needed. After the transfer, trustees usually pay tax on rental profits and future gains.
In a discretionary trust, no beneficiary has an automatic right to income or capital. The trustees decide who benefits, when and by how much. In an interest in possession trust, one beneficiary has a right to the trust income as it arises. The inheritance tax treatment depends on when and how the trust was created.
SDLT depends on chargeable consideration. If property is gifted into a trust with no money paid and no mortgage taken over, there is usually no SDLT. If the trustees take over an existing mortgage, the debt can count as consideration and SDLT may be due. For residential property, the 5% higher-rate surcharge may also apply.
Conclusion
A discretionary trust can help with inheritance tax planning, property succession and family asset protection, but it is not a simple tax-saving shortcut. For landlords, any possible IHT benefit must be weighed against the 20% entry charge, 10-year and exit charges, trust income tax on rent, CGT on future disposals, SDLT on mortgaged property and the possible loss of the residence nil-rate band on a main home.
The right structure depends on your property portfolio, income needs and family goals. Before transferring property into a discretionary trust, compare it with personal ownership, a buy-to-let company and a family investment company so you can see the tax cost and succession benefits side by side.
WORK WITH UK PROPERTY ACCOUNTANTS
Get a fixed-fee IHT and trust planning review for your property portfolio. We model the entry charge, 10-year charges, rental income tax, and compare a discretionary trust against a limited company or FIC.
This article is for general information only and is not tax advice. Your circumstances may change the outcome, so speak to a qualified adviser before acting.
- Deed of Variation: IHT, CGT & SDLT on Inherited Property - 13 October 2026
- UK Budget 2026 and Iran War: What Landlords Need to Know - 12 October 2026
- 7 Autumn Budget 2026 Predictions Every Landlord Should Know - 8 October 2026
