How are trusts taxed in the UK? A 2026 guide

What do we mean by a ‘UK’ trust?

The tax status of a trust depends on several factors. For the purposes of this briefing, “UK trust” means a trust settled by a UK-domiciled (or, since April 2025, long-term UK resident) settlor, or holding UK assets, and which is resident in the UK for tax purposes. Offshore trusts, and trusts with a non-UK resident or formerly non-domiciled settlor, follow a different and more complex set of rules that we address separately in our work on offshore trusts, residence and domicile.

How are trusts taxed when they are created?

Inheritance tax: the entry charge

Creating a lifetime trust is generally a Chargeable Lifetime Transfer, which produces an immediate IHT charge on the settlor (the “entry charge”). The taxable value is the amount by which the chargeable transfer exceeds the settlor’s available nil-rate band (currently £325,000), and it is taxed at 20%. If the settlor dies within seven years of the transfer, a further charge can arise.

There are important exceptions to the entry charge, including:

• assets qualifying for business property relief (BPR) or agricultural property relief (APR), though these reliefs are now capped, as explained below;
• trusts funded from ‘normal expenditure out of income’, bare trusts and vulnerable beneficiary trusts.

Capital gains tax: disposal and holdover

A transfer into trust is normally a deemed disposal at market value by the settlor for CGT, so tax is due on any gain. In many cases it is possible to defer that gain by claiming ‘holdover relief’: the trustees take the asset at the settlor’s base cost and pay CGT on the whole gain only on a later disposal.

How are trusts taxed during their lifetime?

Inheritance tax: the relevant property regime

Broadly, a trust created after 22 March 2006 enters the ‘relevant property regime’ (RPR). Under the RPR, trustees face IHT charges of up to 6% on each ten-year anniversary of the trust’s creation, and pro-rata ‘exit charges’ when capital leaves the trust between anniversaries. In return, the assets do not form part of the beneficiaries’ estates for IHT.

The main exception is a qualifying interest in possession (IIP) trust, either established before 22 March 2006 or created on death through a Will. These sit outside the RPR; instead the trust assets are treated as belonging to the life tenant for IHT.

Capital gains tax: 24% and a reduced allowance

Following the changes that took effect from 30 October 2024, trustees pay CGT at a flat 24% on gains (the same top rate that now applies to individuals on both residential and other assets). Trustees have an annual exempt amount, but it is only £1,500 for 2026/27, half an individual’s £3,000. Where a settlor has created several trusts, that £1,500 is divided between them, subject to a £300 minimum per trust. Vulnerable beneficiary trusts receive the full £3,000.

Trustees can still claim reliefs in the right circumstances, including Business Asset Disposal Relief (now charged at 18% from 6 April 2026, up from 14%), Investors’ Relief and Private Residence Relief.

Income tax: it depends on the type of trust

Benedict’s Experience

Although the headline IHT rate for the ten-year charge is 6%, various reliefs and time-apportionment means that the flat 6% is almost never seen in practice. The most obvious ‘reduction’ to the rate is the nil rate band which, if fully available when assets are settled into trust, would reduce the rate at the ten-year anniversary to much less than the full 6% – for instance, a £1m trust value which had a full nil rate band available when assets were settled would reduce the anniversary charge to just over 4%. Additionally, although APR and BPR now come into charge, an important consideration is whether the trustees should pay that tax by ten yearly instalments which, for APR and BPR assets, would be free from interest.

How are trusts taxed when they come to an end?

Inheritance tax

If a trust is within the RPR, an exit charge arises when capital is appointed to a beneficiary or when someone becomes absolutely entitled to trust assets. On the death of a life tenant with a qualifying IIP, the trust value forms part of their estate and is broadly chargeable to IHT alongside their personal assets, but there is no separate exit charge.

Capital gains tax

Without a relief, ending a trust is a deemed disposal at market value by the trustees, producing CGT on any gain. Holdover relief may be available on transfers out of an RPR trust (or other reliefs may apply). The position differs on the death of a life tenant with a qualifying IIP: the trust assets are rebased to market value for CGT, in the same way as the life tenant’s personal assets.

Is the tax different if the settlor can benefit?

Yes. If the settlor (or their spouse) can benefit from the trust, a series of anti-avoidance rules apply: the income is taxed on the settlor, and the trust assets remain in the settlor’s estate for IHT as well as entering the relevant property regime. These ‘settlor-interested’ rules are a common trap, and they materially change the analysis, so the identity of the potential beneficiaries needs to be checked before anything is settled.

Benedict’s Experience

In 2021, a client was considering settling some shares in a private trading company which were standing at a healthy gain. We advised the client to settle these shares into trust and utilise holdover relief; although the trustees would inherit the base cost of the shares, the value was able to be passed out of the settlor’s estate without a charge to CGT or IHT (the latter because BPR applied) and the trustees would only have to pay CGT once the shares were sold. Any future growth in shares would be outside the settlor’s estate.

How do the April 2026 business and agricultural property relief changes affect trusts?

The most significant recent change for trusts holding trading businesses or farmland took effect on 6 April 2026. Announced at the Autumn Budget 2024 and amended twice since, 100% agricultural and business property relief is now capped. The first £2.5 million of combined qualifying agricultural and business property still attracts full relief; value above that receives 50% relief, an effective 20% IHT rate. (The cap was originally set at £1 million, then made transferable between spouses at Budget 2025, and finally raised to £2.5 million per estate on 23 December 2025. The rules are in the Finance Act 2026.)

For trusts the detail matters. A relevant property trust has its own £2.5 million 100% relief allowance, which refreshes every ten years and is applied when calculating ten-year and exit charges on unrelieved value. However, where one settlor has created multiple trusts on or after 30 October 2024, the single £2.5 million allowance is shared between them; trusts set up before that date each keep their own allowance. Unlisted shares such as those on AIM now attract 50% relief rather than 100%.

Benedict’s Experience

The impact of the restriction to APR and BPR is extremely significant for multi-generational family trusts where family farms and businesses have been held in protective structures for several generations. The majority of these trusts have enabled these family assets to be retained and protected from many different risks and importantly retained as a whole. The main issue for these trustees is now how to fund the IHT bill which had, hitherto, been nothing. Trustees have also had to ensure that they are eligible for the full £2.5m allowance. The impact is yet to be really seen and there has been a lot of speculation in the press; the main consideration is always how to fund the IHT bill when these structures often are ‘asset rich; cash poor’ and unable to fund additional liabilities. The most surprising thing about the new legislation is the fact it makes it unattractive for families to continue small businesses or farming when other assets would give greater capital growth, and income yield, and therefore it seems to actively punish trading businesses. The fact that there was no specific exemption for trading businesses or even a clawback provision to prevent people from selling these assets after an IHT event and distributing IHT free, seems to many to be unjust and short-sighted.

What could a change of government mean for trust taxation?

Trust taxation does not exist in a vacuum, and the political backdrop in 2026 is unusually relevant. Andy Burnham, Prime Minister, has framed his economic thinking around the idea that the UK “over-taxes labour and under-taxes assets”. Reporting on his likely agenda points to reform of capital gains tax and inheritance tax rather than a headline wealth tax, including proposals associated with his circle to align CGT more closely with income tax and to end the CGT uplift on assets inherited on death. He has not ruled out a wealth tax on the very wealthiest, while indicating it would not be an immediate priority, and has maintained the pledge not to raise the headline rates of income tax, VAT or National Insurance.

None of this is law, and it would be wrong to plan on the basis of speculation. But the direction of travel is worth understanding. Ending the CGT death uplift would remove the rebasing that currently benefits qualifying IIP trusts on a life tenant’s death. Closer alignment of CGT and income tax rates would increase the cost of disposals by trustees, who already pay CGT at the top 24% rate. And the recent capping of APR and BPR shows that reliefs long relied upon by trusts can change quickly. The sensible response is not to react to headlines but to keep trust structures under regular review so that they remain efficient whatever the next Budget brings.

Getting trust taxation right

Trust taxation is a moving target: the rates and reliefs have shifted repeatedly in recent years, and the political debate suggests more change to come. The principles in this guide are the framework, but the right answer always depends on the specific trust, its assets and the people involved. At Payne Hicks Beach, our Private Client team advises settlors, trustees and beneficiaries on the full life of a trust, from creation and funding through to ten-year charges, distributions and winding up.