Periodic charges on exisiting discretionary trust


May I please check my understanding of the circumstances as described below. I have outlined just the basic details for my enquiry.

Background: Whilst dealing with LPAs, I came across 2 lifetime trusts set up by a client and his wife in respect of houses purchased by way of mortgage for their two sons. The idea was to protect these assets for their sons. In each trust, the ‘trust’ owns the houses, are the mortgagor and pay the same. These amounts are contemporaneously paid back into the trust by the relevant son (so no income tax liability).

Settlors – Mum and Dad
2 Discretionary Trusts set up for the purchase of their sons’ houses in 2002 (some cash and mortgage).
Trustees – Mum and Dad and 1 other (their accountant) all still alive.
Beneficiaries of each trust– their two sons and remoter issue etc etc. One son and family living in each house.

I noticed the 20th anniversary was upcoming and enquired, inter alia, as to the 10 year charge. They were not aware of any charges due or that had been paid previously. On my suggestion, they asked the accountant (one of the trustees) about this. His response was to say the 10 year charge did not apply as the trusts were set up before 2006.

The understanding I have, which is what I am asking to be confirmed, is that prior to the Finance Act 2006 IIP trusts were exempt from periodic charges as different rules applied. This was changed by the aforementioned act and bought them into line generally with discretionary trusts, which always were subject to the periodic charges. Therefore, my conclusion that these trusts are liable for the periodic charges and always have been.

Firstly, I would be very grateful if you could confirm this is correct, so I can advise on appropriate action. Secondly, may I ask, when valuing the trust property for charging purposes, will this be net of any mortgage owing?

Thank you in advance.

I do believe there was a similar question posted on here but I cannot locate it.

Paul as these are discretionary trusts, I agree with you that they are liable for the charge.

The IHT 100 clearly shows that mortgages may be included amongst the liabilities which may be deducted.

Patrick Moroney
Bwl solicitors

Thank you Patrick, I wanted to check my understanding before I spoke the the accountant trustee.


If the trusts are pre 2006 IIP trusts with the sons as life tenants, then they are not subject to periodic charges because they are not relevant property trusts. The value of the trust accumulates to the estate of the life tenant on death. If, however, they are discretionary trusts, then they are relevant property and are subject to periodic charges. Post 2006 IIPs are relevant property apart from in certain prescribed situations (the most common being an immediate post death interest). IHTM16061 - Inheritance Tax Manual - HMRC internal manual - GOV.UK ( They key to the correct position will depend on reading and understanding the trust deeds to confirm what type of trust they are.

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Thank you Kirsty, that is absolutely my understanding. They are definitely discretionary trusts, eg inter alia power to accumulate income, no interest given to any particular beneficiary just the power/discretion to give the ‘benefit’ of the trust property to any given beneficiary etc etc.

Thank you for your input.