Last updated: 16 October 2026
The question
My spouse and I own a £1 million property as tenants in common, 50% each. We have no other assets. On the first death, the deceased’s share will go into a discretionary trust run by our two children. What tax is due, and what happens to the surviving spouse?
Inheritance tax on the first death
Gifts to a spouse or civil partner are exempt from inheritance tax (IHT), but a gift to a discretionary trust is not. So the £500,000 half share going into the trust is taxable, after the deceased’s nil rate band of £325,000. The residence nil rate band does not apply, because the home is not passing directly to children.
| Item | Amount |
| Share passing to trust | £500,000 |
| Less nil rate band | £325,000 |
| Taxable | £175,000 |
| IHT at 40% | £70,000 |
A discount of around 10% to 15% on the value of a half share is often possible, because a share of a property is harder to sell, which reduces the tax.
Ongoing trust charges
A discretionary trust is a “relevant property” trust. It pays a periodic charge of up to 6% of the value above the nil rate band every 10 years, and an exit charge when assets leave the trust. With a half share worth around £500,000, the 10-year charge could be several thousand pounds.
The surviving spouse living in the property
If the trustees let the surviving spouse live in the home, HMRC may argue that the survivor has an interest in possession. Whether that is the case depends on the trust wording and how the trustees act. It can change the IHT position on the second death, so the trust deed should be drafted with this in mind.
Capital gains tax
On death, assets are revalued for CGT, so the trust takes the half share at its market value at death. The surviving spouse’s own half keeps Private Residence Relief while it remains their home. The trust’s share may not get the same relief when sold unless conditions are met.
Alternatives to consider
- Immediate post-death interest (IPDI) trust: the survivor has the right to live in the property for life. This qualifies for the spouse exemption, so no IHT on the first death, and the transferable nil rate band and RNRB can then be used on the second death.
- Nil rate band trust only: put just £325,000 into the trust and leave the rest to the spouse, so no IHT is due on the first death.
- Leave everything to the spouse: this can pass on up to £1 million IHT-free on the second death, using both nil rate bands and both RNRBs.
Frequently asked questions
Why use a discretionary trust at all?
For flexibility and asset protection, for example on remarriage, care costs or children’s divorces.
Who pays the £70,000?
The executors, from the estate, which can force a sale if there are no other assets.
Can the will be changed after death?
Yes, a deed of variation within two years can redirect the share.
Does the trust need to register?
Yes, most trusts must register with HMRC’s Trust Registration Service.
Related: completing a trust and estate return, the residence nil rate band and jointly owned inherited property.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with wills, trusts and inheritance tax. See our inheritance tax planning service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 16 October 2026. It is not personal advice, so speak to an accountant about your own situation.
