1. Home
  2. Technical Central
  3. Protection guidance
  4. General and tools
  5. Taxation of a discretionary trust, created by joint settlors
Kim Jarvis
Protection Technical Specialist – Tax and Trusts

Share

Taxation of a discretionary trust, created by joint settlors

Published  03 November 2025
   4 min read

This article explains the taxation of a discretionary trust where joint plan owners place their whole of life plan into one.  

Where two individuals create a discretionary trust, each individual is treated as having made a separate trust or ‘settlement’ for inheritance tax (‘IHT’) purposes, with each settlement having its own nil rate band.  

Key facts

  • Premiums under a jointly owned whole of life plan are assumed to have been made 50/50 unless there is evidence to the contrary.
  • For inheritance tax purposes each settlement will have its own nil rate band.
  • Discretionary trusts are subject to inheritance tax periodic and exit charges and the trustees will need to calculate these charges independently.
  • It is the trustees’ responsibility to calculate, report and pay any inheritance tax charge on the trust.

Periodic (Principal) Charges 

Every 10 years the value of the settlement, less the available nil rate band and previous chargeable lifetime transfers in the seven years before it started, will be assessed for tax. 

For whole life plans the ‘value’ of the settlement is the greater of: 

  • the open market value. Where the whole life has an investment element this would probably be the surrender value. If the whole life doesn’t have an investment element this would be zero. However, the open market value could be higher if the settlor is in serious ill health, or
  • the total premiums paid to date, or
  • the claim proceeds if it has been paid into the trust and remains there at a 10-year anniversary. 

Joint Settlors 

Where two people own a whole of life plan which they place into a discretionary trust, each person is treated as having made a separate settlement. (HMRC Inheritance tax manual IHTM42253 - The settlor: more than one settlor) 

As long as the two settlors have paid the same amount to the trust and have no chargeable transfers in the seven years before the trust was created, the charges will be the same in respect of each settlement. However, if the settlors have contributed different amounts, or they have a different seven-year history of chargeable transfers the IHT charges may differ for each settlement.

Example

Rob and Georgia take out a joint life second death whole of life plan and place it under a discretionary trust. The yearly premiums are £50,000 and it is assumed that they have paid half the premiums each. 

The premiums cannot be covered by the normal expenditure out of income and both Rob and Georgia have used their £3,000 annual exemption elsewhere. We will also assume neither has made any chargeable lifetime transfers in the seven years before the trust was created and the nil rate band is still £325,000. 

What happens at the 10th anniversary? 

Both Rob and Georgia are alive and in good health, so the value of the trust is based on the total premiums paid to date - £50,000 x 10 = £500,000. 

But remember that Rob and Georgia are treated as having made separate settlements and are each assumed to have paid half the premiums. Therefore, the value of each settlement is £250,000. As this is less than the nil rate band there is no tax to paid on either settlement. 

At the 20th anniversary the total premiums paid to date will be £50,000 x 20 = £1,000,000. 

Again, Rob and Georgia are alive and in good health so each settlement will have a periodic charge of £10,500 (£500,000 - £325,000 x 6%). As a periodic charge is payable the trustees will need to complete an IHT100d, for each settlement and submit this to HM Revenue and Customs within six months of the anniversary. Payment of the charge is also due six months after the anniversary.  

But what happens when one of the settlors dies? 

Unfortunately, the day after the 10th anniversary Georgia dies. Being second death the plan continues but the full premium will now be paid by Rob. 

At the 20th anniversary the total premiums paid to date is still £1,000,000 and there are still two settlements however, the calculation on each settlement will be different. 

Georgia’s settlement: 
  • After Georgia’s death no contributions have been made to her settlement. Therefore, the value of her settlement would be £25,000 x 10 = £250,000. 
  • The nil rate band remains at £325,000. 
  • Therefore, no periodic charge.
Rob’s settlement: 
  • After Georgia’s death as Rob continues to pay the full premium the value of his settlement would be:
    • first 10 years - £25,000 x 10 = £250,000 plus
    • next 10 years - £50,000 x 10 = £500,000
  • The nil rate band remains at £325,000.
  • Periodic charge – (£750,000 - £325,000) x 6% = £25,500
  • The trustees will need to complete an IHT 100d and pay the tax within six months of the anniversary. 

Conclusion 

When calculating the periodic charge on a discretionary trust that has joint settlors, trustees need to be aware of: 

  • Each settlor’s chargeable transfers in the seven years before creating the trust.
  • Each settlor’s contribution to the premiums (which is assumed to be 50/50 unless there is evidence to the contrary).
  • On first death the surviving settlor’s contribution to the premium will be 100% 

Disclaimer

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.