How much can you put in a trust tax-free? The £325,000 limit, the 20% charge above it, and the 7-year reset

One of the most common questions about trusts is the simplest one: how much can you put into a trust without immediate inheritance tax? The answer is more nuanced than the question, but the headline number is clear.

The short version: up to £325,000 in any seven-year period, into a discretionary or other relevant property trust, with no immediate inheritance tax charge. Anything above that triggers a 20% lifetime charge. There are also charges every ten years and on exit. The £325,000 allowance resets every seven years.

Below is the longer version, and a worked example that shows how the rules play out in practice.

The £325,000 nil-rate band, applied to trusts

Every individual in the UK has a nil-rate band of £325,000 for inheritance tax. This is the amount you can give away on death, or transfer during your lifetime into a relevant property trust, without inheritance tax being charged. The band is frozen at £325,000 until April 2031 under current legislation.

A relevant property trust is the technical category that covers most discretionary trusts and many other trusts that are not bare trusts or qualifying life-interest trusts. It is the most common type used for inheritance tax planning.

When you transfer assets into a relevant property trust, the transfer is a chargeable lifetime transfer for inheritance tax purposes. Up to £325,000 in any seven-year period can be transferred this way with no immediate inheritance tax charge, provided you have not used the band on other chargeable transfers in that period.

The 20% lifetime charge on the excess

If you transfer more than £325,000 into a relevant property trust in any seven-year period, the excess is taxed at 20% as a lifetime charge. The 20% is paid at the time of transfer, typically by the trustees from the trust assets (or by the settlor, in which case the rate is grossed up because the tax itself is treated as a further gift).

This is not the only tax that can apply to the transfer. If the settlor dies within seven years of making the transfer, additional inheritance tax may be due at the full 40% rate, with credit for the 20% already paid.

For most families using trusts for estate planning, the practical effect is that they limit each transfer to the £325,000 nil-rate band amount, wait seven years, and then can transfer another £325,000 with the band reset.

The 7-year reset, explained simply

The nil-rate band for trust purposes looks back seven years. Transfers into trust over the previous seven years are added together, and the £325,000 allowance is applied to that combined total.

So a transfer of £325,000 today uses the entire allowance. A second transfer six years later would be added to the first, exceeding the band, and the excess would be taxed at 20%. A second transfer seven years and a day later, after the first has dropped out of the seven-year window, can use a fresh £325,000 allowance.

This is the reason long-term trust planning is often structured as a series of transfers, each spaced at least seven years apart, with each one staying within the nil-rate band.

The 10-year periodic charge

Discretionary trusts and other relevant property trusts are subject to a periodic charge every ten years. The charge applies to the value of the trust assets above the trust's available nil-rate band at that point.

The maximum rate of the periodic charge is 6%, but the effective rate in most cases is lower (often between 0% and 3%) because of how the calculation works. The actual rate depends on the value of the trust, the available nil-rate band, the size of the original transfer, and the time since the trust was set up.

For a trust that was funded at exactly £325,000 and where the value has not significantly increased, the periodic charge is often nil. The point of the charge is to recover the inheritance tax that would otherwise be deferred indefinitely by holding assets in trust rather than in personal ownership.

Exit charges

When assets leave the trust (paid out to a beneficiary, for example), an exit charge may apply. The exit charge is a pro-rata version of the periodic charge, based on the time since the last ten-year anniversary.

Exit charges in the first ten years of a trust are based on the initial value transferred in. After the first ten-year anniversary, they are based on the rate calculated at that anniversary. Like the periodic charge, the effective rate is often modest, particularly where the trust was funded within the nil-rate band.

A worked example

Frank, aged 60, has an estate of £1.2 million. He decides to set up a discretionary trust for his children and grandchildren, funded with £325,000 from his investments.

At the point of transfer:

• The £325,000 falls within the nil-rate band, so no immediate inheritance tax is due.
• The £325,000 is now outside Frank's estate for inheritance tax purposes, subject to him surviving seven years.
• If Frank dies within seven years, the £325,000 is brought back into the seven-year cumulation for his estate, but the nil-rate band still applies first.
• If Frank survives seven years, the £325,000 has dropped out of his cumulative seven-year total. He could make another transfer of £325,000 into a separate trust, again within the band.

At the trust's first ten-year anniversary:

• The trust assets are valued. If the value is still around the nil-rate band, the periodic charge is likely to be modest or nil.
• The calculation applies a notional inheritance tax charge at the lifetime rate (20%) to the value above the trust's available nil-rate band, then takes 30% of that to give the periodic rate, with a maximum effective rate of 6%.
• For a trust within the nil-rate band, the periodic charge is typically a small administrative cost rather than a major hit.

If the trustees make a distribution to Frank's grandson three years after the ten-year anniversary, an exit charge applies to the distribution, calculated as a pro-rata fraction of the rate set at the anniversary.

Using multiple trusts

It is sometimes possible to use multiple trusts to spread assets and benefit from separate nil-rate bands at each ten-year anniversary. The anti-avoidance rules around this (in particular the 'same-day addition' and 'related settlement' rules) mean that simply setting up several trusts on the same day rarely works as intended. The planning is real but it needs to be done properly.

When to take advice

Trust taxation is one of the areas where the rules are simpler in description than they are in practice. The interactions between the nil-rate band, the seven-year cumulation, the ten-year periodic charge, the exit charge, and the rest of the settlor's estate planning are detailed.

For straightforward family trusts funded within the nil-rate band, the position is usually manageable and the tax position predictable. For larger trusts, or where the family is also making lifetime gifts or planning around the residence nil-rate band, the calculations need someone who does this every day.

Simply Estate is an estate planning firm. Our trust team can run the numbers on a trust that fits your circumstances, including the periodic and exit charges over time. Visit our trusts page to book a free, no-obligation review.