Understanding Trust Charges: When Do Periodic and Exit Charges Really Apply?
If you’ve ever read about trust charges — particularly periodic or exit charges — you’ll notice the phrase “charges may apply” is used endlessly, with very little precision. This ambiguity leads to confusion among clients and advisers alike.
In this post, we’re cutting through the uncertainty. You’ll discover exactly when these charges will apply, how they’re calculated, and how to plan effectively around them.
What Are Periodic and Exit Charges?
Periodic Charges (10-Year Charges)
These apply to most relevant property trusts — such as discretionary trusts or accumulation and maintenance trusts — and are assessed every 10 years after the trust is created.
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The charge is up to 6% of the trust’s value above the available nil-rate band at that time.
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Calculated on the value of relevant property (i.e. trust assets) on the 10-year anniversary.
Exit Charges (Also called Proportionate Charges)
These occur when capital leaves the trust between 10-year anniversaries.
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Based on the time since the last periodic charge, and the value over the nil-rate band at that point.
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Maximum effective rate is less than 6%, calculated on a sliding scale depending on when the exit occurs.
When Do These Charges Actually Apply?
Charges apply only to trusts that fall under the Relevant Property Regime, which includes:
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Discretionary trusts
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Interest in possession trusts created on or after 22 March 2006
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Accumulation & maintenance trusts created after 2006
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Most discounted gift trusts (DGTs) using discretionary structures
They do not apply to:
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Bare trusts
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Will trusts within 2 years of death
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Disabled person’s trusts (meeting statutory definitions)
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Interest in possession trusts created before 22 March 2006 (unless altered)
Case Study 1 – Discretionary Trust: Entry and 10-Year Charge
Client: John (aged 68)
Gift: £600,000 into a discretionary trust in 2025
Nil-rate band: £325,000 (no other CLTs in 7 years)
Outcome:
Entry Charge:
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CLT of £600,000 – £325,000 = £275,000
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Immediate charge: 20% x £275,000 = £55,000
10-Year Charge in 2035:
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Trust value has grown to £900,000
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Assume NRB is £350,000 in 2035
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Chargeable amount = £900,000 – £350,000 = £550,000
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Max charge = 6% x £550,000 = £33,000
Key Point: Both the entry charge and the 10-year charge definitely apply because:
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The trust is discretionary
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The value exceeded the nil-rate band
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It survived 10 years
Case Study 2 – Discounted Gift Trust (DGT) Using a Discretionary Structure
Client: Susan (age 72, in good health)
Gift: £500,000 into a DGT in 2025
Discount (actuarially assessed): £150,000
CLT value = £350,000
No prior CLTs
Entry Charge:
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CLT = £350,000 – £325,000 = £25,000
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Entry charge: 20% x £25,000 = £5,000
(Small, because of discount and NRB)
10-Year Charge:
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In 2035, value = £600,000
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Assume NRB is £350,000
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Charge = 6% x (£600,000 – £350,000) = £15,000
Key Point: Even though a DGT is used, the trust is discretionary — so periodic and exit charges do apply if the NRB is exceeded.
Case Study 3 – Bare Trust for Grandchildren
Client: Alan (aged 70)
Gift: £300,000 into a bare trust for three grandchildren
No prior gifts
Trustees: Alan and his daughter
Beneficiaries: Grandchildren named individually
IHT Treatment:
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This is a potentially exempt transfer (PET), not a CLT
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If Alan survives 7 years: fully IHT-free
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No periodic or exit charges ever apply
Key Point: Because the trust is a bare trust, there are no periodic or exit charges, regardless of value or growth.
How Are Exit Charges Calculated?
The exit charge rate is based on the effective rate used at the last periodic charge (or at inception if before 10 years), pro-rated based on time since that charge.
Formula (simplified):
So, if:
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Effective rate at last 10Y charge = 4.5%
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Exit made 5 years later (20 quarters)
Exit charge = 4.5% × 20/40 = 2.25%
Applies only to the value over NRB being distributed.
Summary Table – Do Charges Apply?
| Trust Type | Entry Charge? | 10-Year Charge? | Exit Charge? |
|---|---|---|---|
| Bare Trust | ❌ No | ❌ No | ❌ No |
| Discretionary Trust | ✅ Yes (if over NRB) | ✅ Yes (if over NRB) | ✅ Yes |
| IIP Trust (pre-2006) | ❌ No | ❌ No | ❌ No |
| IIP Trust (post-2006) | ✅ Yes | ✅ Yes | ✅ Yes |
| Discounted Gift Trust | ✅ Yes (on gift minus discount) | ✅ Yes | ✅ Yes |
| Disabled Person’s Trust | ❌ No | ❌ No | ❌ No |
| Loan Trust | ❌ No (only loaned, not gifted) | ✅ On growth if structured as discretionary | ✅ On capital distributed |
Key Takeaways
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Always check the type of trust and the value of the transfer against the nil-rate band
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“May” be a periodic charge = yes in most discretionary structures once above £325,000
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Don’t overlook charges simply because the trust is set up with an insurance provider — many DGTs and loan trusts still fall under the Relevant Property Regime
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For those creating large trusts or expecting growth, factor in compounded 10Y and exit charges as part of the long-term IHT plan
Why is the periodic charge up to 6%?
Because 6% is the statutory maximum HMRC allows under the Relevant Property Regime, but the actual amount paid is based on:
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The value of the trust on the 10-year anniversary
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The available nil-rate band (NRB) at that time
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Any trustees’ liabilities that reduce the net value
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The effective rate of tax, which is rarely the full 6%
Legal Basis:
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Schedule 4 of the Inheritance Tax Act 1984 lays out the rules
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The charge is calculated as:
30% of the IHT that would be payable if the trust assets were transferred to an individual, assuming a CLT — hence:
30% of 20% = 6% maximum (as 20% is the lifetime IHT rate for CLTs over the NRB)
So, how is the actual rate determined?
Step-by-step breakdown (simplified):
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Calculate the value of relevant property on the 10-year anniversary.
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Deduct the available NRB (which may be reduced if other trusts/gifts exist).
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Apply the lifetime rate of 20% to the excess.
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Multiply the result by 30% to find the actual periodic charge.
Example:
Trust value at 10-year point: £800,000
Available NRB: £325,000
Excess: £475,000
Tax at 20%: £95,000
Periodic charge: 30% of £95,000 = £28,500
Effective rate: £28,500 ÷ £800,000 = 3.56%
So although the statutory max is 6%, in this example it’s only 3.56%.
Why is it capped at 6%?
HMRC designed the system to:
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Discourage excessive use of discretionary trusts for IHT avoidance
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Apply a light-touch IHT charge to trust structures every 10 years
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Avoid full 40% charges during the settlor’s lifetime, but still capture value systematically over time
Common Misunderstandings:
| Myth | Reality |
|---|---|
| “The 10-year charge is always 6%” | ❌ No — that’s the maximum, not the default |
| “Trusts always face these charges” | ❌ Not if they’re bare, disabled, or below the NRB |
| “Only value above the NRB is taxed” | ✅ Correct — you get one NRB per trust unless related |
Final Thoughts
Periodic and exit charges are often brushed over — but they can materially impact long-term outcomes, especially where trusts hold growth-oriented assets over multiple decades. If you’re considering using trusts as part of your inheritance tax planning, contact us today for a fee-free initial meeting (schedule your meeting now) with a Chartered Financial Planner. We’ll help you understand whether a trust could support your IHT mitigation goals or form part of your broader financial planning strategy.
