Settling property into a discretionary trust during life is the third route in the landlord IHT planning trio alongside direct lifetime gifts (the seven-year clock, covered on our Wave 4 C4 page) and Family Investment Company structures (Wave 4 C7, forthcoming). The chargeable-lifetime-transfer (CLT) mechanic triggers a 20% IHT charge at the point of settlement on the value above the settlor's available nil-rate band, with the trust then running under the relevant property regime's 10-year periodic charges and exit charges. The CGT side hinges on s.260 TCGA 1992 holdover, which is the route's strategic value (it defers the CGT into the trust's base cost rather than crystallising it on the transfer in), and the settlor-interested trust exclusion under ss.169B to 169G TCGA 1992 is the most common landlord misstep.

For a side-by-side tax comparison of FIC versus discretionary trust on the same axes (IHT, IT / CT, CGT, setup cost, control), see our existing pillar at FIC vs Discretionary Trust for Property. This page goes deeper on the trust side specifically: the mechanic, a worked Patel £400,000 BTL settlement showing IHT plus CGT plus SDLT plus the year-10 projection, the settlor-interested trap that breaks the s.260 holdover, the deed-of-variation route that turns a first-death NRB into a no-cost settlement, and when the CLT route is definitely the wrong choice.

The CLT mechanic in one paragraph

A transfer of property into a relevant property trust (most discretionary trusts and many interest-in-possession trusts settled after 22 March 2006) is a chargeable lifetime transfer under IHTA 1984. The CLT triggers an immediate 20% IHT charge on the value of the property above the settlor's available nil-rate band, with the settlor (or the trustees) paying the IHT to HMRC within 6 months of the end of the month of transfer. The available NRB is £325,000 less any 7-year cumulative gifts the settlor has already made. If the settlor dies within 7 years of the CLT, an additional charge is computed at the full 40% death rate less the 20% lifetime rate already paid, tapered by s.7(4) between years 3 and 7. The CGT on the transfer in is held over under s.260 TCGA 1992 if the trust is non-settlor-interested; if it is settlor-interested (ss.169B to 169G TCGA 1992), the holdover is denied and the CGT crystallises at market value under s.17.

Inside the trust, the relevant property regime applies. Section 64 IHTA 1984 imposes a periodic charge of up to 6% on the trust's chargeable value at each 10-year anniversary. Section 65 imposes a proportionate exit charge on capital distributions made between anniversaries. Income distributions are taxed in the recipient's hands at their marginal income tax rate but do not trigger exit charges.

The 20% entry charge: computing the cost

The 20% lifetime IHT applies to the value of the transfer above the settlor's available NRB at the date of the transfer. The arithmetic:

  • Step 1. Value the property at market value at the transfer date. For a residential BTL this is typically a formal RICS valuation; for a less liquid asset it is the agreed open-market figure.
  • Step 2. Compute the settlor's available NRB at the transfer date. Starting figure £325,000 (frozen until 5 April 2031 per the current gov.uk IHT thresholds publication). Less any 7-year cumulative chargeable transfers already made by the settlor (any earlier CLTs or any PETs that would have failed if the settlor had died at the date of the new transfer, which for a living settlor reduces to the cumulative CLTs in the 7 years before the new transfer).
  • Step 3. Compute the chargeable element: value at Step 1 minus available NRB at Step 2.
  • Step 4. Apply the 20% lifetime rate to the chargeable element. The trustees pay (typically from trust funds where the trust has cash at settlement time), or the settlor pays from personal funds. If the settlor pays from personal funds, the gross-up rule at s.5(2) IHTA 1984 increases the chargeable element to incorporate the IHT itself: gross factor 1/(1-0.20) = 1.25.

Worked: settlor with full unused NRB of £325,000 transfers a £400,000 BTL into a discretionary trust. Chargeable element £75,000. Lifetime IHT 20% × £75,000 = £15,000. If trustees pay from trust funds (the trust having been settled with the property plus a small cash buffer), the gross-up does not apply and the chargeable element remains £75,000.

The 7-year top-up if the settlor dies

If the settlor dies within 7 years of the CLT, an additional charge is computed:

  • Total IHT at death rate: 40% × chargeable element (less any retrospective NRB adjustment if other PETs in the 7-year window have failed, requiring a recomputation of cumulative gifts).
  • Less the 20% lifetime IHT already paid.
  • Less taper relief under s.7(4) between years 3 and 7: 80% of the top-up at 3-4 years, 60% at 4-5 years, 40% at 5-6 years, 20% at 6-7 years.

Worked on the same £75,000 chargeable element. Settlor dies in year 5. Death IHT 40% × £75,000 = £30,000. Less lifetime IHT £15,000 = £15,000 top-up before taper. Year 5 to 6 taper band: 40% of full rate, so 40% × £15,000 = £6,000 effective top-up. Less the £15,000 already paid: a £9,000 REFUND would actually arise where the tapered death rate is less than the lifetime rate paid. The taper mechanic operates in favour of the donor's estate in some bands. A donor surviving 7 years: no further charge; the £15,000 lifetime IHT is final. A donor dying within 3 years: full 40% × £75,000 = £30,000 less the £15,000 already paid = £15,000 additional, no taper relief.

The 10-year periodic charge

Section 64 IHTA 1984 imposes a charge on the value of the trust's relevant property at each 10-year anniversary. The mechanic is mathematically intricate but the headline figure is a maximum 6% of the chargeable trust value at the periodic charge date, computed by reference to the hypothetical chargeable transfer formula at IHTM42100 onwards.

The rate formula in outline: the trustees compute a hypothetical lifetime transfer at the 10-year date by reference to the trust's value plus the settlor's pre-settlement 7-year cumulative gifts, less the available NRB at the periodic charge date. The effective rate is then 30% of the lifetime rate that would apply to that hypothetical transfer, time-apportioned for any periods within the 10 years where the trust held non-relevant property. The maximum effective rate is 6% (30% of the 20% lifetime rate, on the assumption the hypothetical transfer is fully above NRB).

Worked at year 10 on the Patel example. £400,000 BTL has grown to £530,000 by year 10. Available NRB at year 10 assumed at £325,000 (NRB frozen until 5 April 2031 per the extended Autumn Budget 2024 settlement, may be uprated thereafter). Trust value above NRB: £530,000 minus £325,000 = £205,000. Hypothetical transfer at this value would pay 20% IHT = £41,000. Effective rate 30% × £41,000 / £530,000 = 2.32%. Periodic charge: 2.32% × £530,000 = approximately £12,300. The actual figure depends on the formula's full application; the trustees compute and report on form IHT100d at the 10-year anniversary.

The s.260 CGT holdover

The CLT trigger unlocks s.260 TCGA 1992. The settlor and trustees jointly elect on the settlor's CGT return for the year of the transfer; the gain on the gift is rolled into the trust's base cost rather than being assessed on the settlor as a deemed disposal at market value.

The election is the strategic value of the trust route for landlords with large latent CGT gains on long-held BTL properties. Without the holdover, a £400,000 BTL with a £213,600 latent gain (the Patel base cost in our worked example) would trigger £40,000 to £50,000 of immediate CGT at the s.17 deemed market value, taxed at 18% or 24% residential rate. With the s.260 election, the settlor pays no immediate CGT; the trust takes the property at the settlor's base cost (£186,400 in the Patel example); the gain is realised by the trustees only on the trust's eventual disposal of the property.

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The settlor-interested trust exclusion

The s.260 holdover is the route's strategic value. The settlor-interested exclusion at TCGA 1992 ss.169B to 169G disapplies the holdover where the trust is settlor-interested. A settlor-interested trust is one where the settlor, the settlor's spouse, the settlor's minor unmarried children, or a corporate body controlled by any of those persons is or may at any time become a beneficiary.

The exclusion is the most common landlord misstep on the CLT route. A parent settles a BTL into a discretionary trust intending to benefit the adult children, but the trust deed draws the beneficiary class as "the settlor's family" or names the settlor (or settlor's spouse) as a discretionary beneficiary "in case of unforeseen need". The trust is then settlor-interested. The s.260 holdover is denied. The CGT crystallises immediately on the transfer in at market value under s.17. On the Patel £400,000 BTL with a £213,600 latent gain, the immediate CGT is approximately £45,000 (£213,600 × 24% effective rate, less any unused annual exempt amount, with the settlor paying via the 60-day residential property return). The trust route has lost its strategic value.

The fix is drafting. The trust deed expressly excludes the settlor and the settlor's spouse from the beneficiary class. The exclusion is documented in the deed itself, not in a side letter or guidance to the trustees. The exclusion applies to all current and any future spouses (so a remarriage by the settlor does not bring the new spouse into the class). The trustees retain discretion over all other family members within the class (children, grandchildren, future descendants, and where appropriate the families they marry into), which is wide enough for the family's planning purposes without triggering the s.169B exclusion.

For the deep treatment of the three-statute attribution stack (ITTOIA 2005 s.624 income tax + TCGA 1992 s.169B CGT + IHTA 1984 s.49(1A) IHT) plus the unwinding playbook for trusts already in place, see our companion page on the settlor-interested property trust three-statute trap.

The Patel worked settlement: full cost summary

The Patel persona, clean (non-settlor-interested) trust. Mr Patel, settlor, age 60, in good health, transfers a £400,000 BTL property into a discretionary trust for the benefit of his two adult children (settlor and spouse expressly excluded from beneficiary class). The BTL was acquired in 2010 for £160,000 base cost plus £4,800 SDLT plus £1,600 legal fees plus £20,000 of enhancement expenditure across the years = total base cost £186,400. Latent gain £213,600.

Year 0 costs.

  • IHT (CLT): £400,000 value less £325,000 NRB = £75,000 chargeable at 20% = £15,000. Paid by trustees within 6 months of the end of the month of transfer.
  • CGT: s.260 election made jointly by settlor and trustees. Gain £213,600 held over into trust's base cost. Trust's base cost becomes £186,400. Settlor pays zero CGT.
  • SDLT: gift transfer with no chargeable consideration (no debt assumed by trustees, no cash payment). Zero SDLT.
  • TRS registration: within 90 days of trust creation. Annual updates thereafter. Compliance cost only.
  • Total Year 0 cost: £15,000.

Year 0 comparison to alternatives.

  • Direct PET gift to children: zero entry IHT, but s.17 deemed market value disposal, gain £213,600 at 24% residential rate (Mr Patel higher rate, age 60), £20,000 unused annual exempt amount, net CGT approximately £45,000 to £50,000. Plus 7-year clock starting from gift date.
  • FIC growth-share gift: zero entry IHT, but CGT on minority-discounted share value at 24%, typically £25,000 to £35,000 on equivalent latent gain. Plus 7-year clock on the share gift.
  • CLT into clean trust (this route): £15,000 entry IHT, zero immediate CGT. No 7-year clock on the trust (the trust holds the property; the children become beneficiaries with discretionary entitlements).

For the Patel facts, the CLT-into-trust route is cheaper by £30,000 to £35,000 at Year 0 than the direct PET, and cheaper by £10,000 to £20,000 than the FIC route. The trust route's offsetting cost is the ongoing 10-year periodic charge plus exit charges on distributions.

Year 10 cost. 10-year periodic charge as computed above, approximately £8,000 to £12,000 depending on the actual rate formula at the date and the trust's value at year 10.

Year 0 to 30 total. Year 0 £15,000 + Year 10 periodic charge approximately £10,000 + Year 20 periodic charge approximately £12,000 + Year 30 periodic charge approximately £15,000 + exit charges on capital distributions to children (proportionate to the rate at the most recent anniversary) totalling perhaps £20,000 to £40,000 across the period. Total trust route cost: in the order of £70,000 to £100,000 across a 30-year window for a £400,000-rising-to-£800,000 trust holding.

The counterfactual: Mr Patel holds the property to death at age 90 (30 years from now). Estate value at death (with growth): £800,000 to £1,000,000. IHT at 40% above his unused NRB on the property: £320,000 to £400,000, less any RNRB available. Even with full £350,000 of combined RNRB (which requires the rest of his estate to be below the £2m taper threshold, often not the case for portfolio landlords), the trust route saves £200,000+ over the 30-year window. The trust route wins comfortably for landlords with substantial portfolios and a 30-year-plus planning horizon.

The deed-of-variation-plus-trust route on first death

One of the most useful combined routes on the trust side. The first-to-die spouse's will leaves the entire estate to the surviving spouse under the s.18 spouse exemption. Within 2 years of the first death, the surviving spouse executes a deed of variation under s.142 IHTA 1984 (covered on Wave 4 C5) redirecting £325,000 of property (matching the deceased's unused NRB) into a discretionary trust for the adult children and grandchildren, with the s.142 IHT election and the s.62(6) CGT election. The variation reads back to the deceased: the trust receives the £325,000 settlement at the deceased's death-uplifted base cost (s.62(1) CGT uplift on death applied before variation); the deceased's NRB is applied to the settlement, so no IHT is payable on the variation; the £325,000 is then outside the surviving spouse's second-death estate.

The combined route achieves a clean trust settlement within the deceased's NRB at zero immediate IHT and zero immediate CGT cost. The trust then runs under the standard 10-year and exit charge regime. The route is one of the most powerful planning moves available to surviving spouses in the deed-of-variation window, and it depends on coordinating the variation drafting with the trust drafting so the s.142 election, the s.62(6) election, and the trust beneficiary class are all aligned. For the deed-of-variation mechanic in full, see Deeds of Variation on Landlord Estates.

When the CLT route is definitely the wrong choice

Three scenarios where the CLT-into-trust route is the wrong tool, despite its strategic value in the right hands:

  1. Settlor-interested trust drafting. If the trust deed includes the settlor or settlor's spouse in the beneficiary class, the s.260 holdover is denied, the CGT crystallises immediately, and the route loses most of its tax-efficiency rationale. The fix is express exclusion in the deed; if that is not possible (because the family wants flexibility for the settlor to benefit in case of need), the trust route is not the right tool.
  2. Donor expects to live more than 7 years with no large latent CGT gain. A direct PET gift to the children achieves the same end result (property outside the estate) with no entry IHT charge, no s.260 election required, and no ongoing 10-year periodic charges. The trust route's entry IHT (£15,000 on a £400,000 BTL) and ongoing periodic charges are an unnecessary cost.
  3. Settlement wanted purely to defer IHT to second death. The s.18 spouse exemption defers all first-death IHT; the deed-of-variation flexibility within 2 years of first death lets the family retro-engineer the right structure with full information. The trust route on first death is locking-in a structure that the deed-of-variation route could have built more flexibly.

The CLT route is right when the family wants defined control through trustees (rather than direct ownership by individuals), CGT deferral via s.260 on a property with substantial latent gain, and structural separation of the property from any family member's personal estate (so the property is not vulnerable to the children's divorces, business failures, or other personal-estate events). For families where these conditions all apply, the route is one of the most useful tools in landlord IHT planning. For all other scenarios, one of the alternatives is usually cheaper or simpler.

For the rule-mechanic on the 7-year PET clock alongside the CLT route, see The IHT 7-Year Rule on Property Gifts. For the FIC structural alternative, see FIC vs Discretionary Trust for Property. For the wider planning lens on landlord IHT, see An IHT Decision Framework for UK Landlords.