What Is A Disabled Person's Trust?
Posted on 13th February 2024 at 16:17
What is a ‘disabled person’s’ trust?
Trust arrangements can provide a protective framework from which vulnerable beneficiaries can benefit by being named a class of potential beneficiaries. The funds within the trust are held legally by the trustees. This means that the vulnerable beneficiary would not be required to manage or administer the assets or trust themselves. This also means that the vulnerable persons’ means tested benefits would not be impacted.
Selecting Trustees
The choice of trustees is very important.
Discretionary Trusts
A ‘Disabled persons’ trust’ also known as a ‘Vulnerable persons’ trust’ operate in a similar manner to discretionary trusts. You can find out more about discretionary trusts here: https://www.averywalters.com/services-for-you/wills-probate-trusts/lifetime-discretionary-trusts/ or for discretionary trusts in Wills, here: https://www.averywalters.com/services-for-you/wills-probate-trusts/discretionary-trust-wills/
These trusts can be set up in your lifetime or in your Will.
However, the tax treatment is significantly different to a discretionary trust and the use of these trusts is limited to situations where the primary beneficiary of the trust is deemed to be “disabled”.
For a trust to qualify and receive special tax treatment, the beneficiary of the trust must be a disabled person.
A disabled person is one who:
• by reason of ‘mental disorder’, within the meaning of the Mental Health Act 1983, is incapable of administering their property or managing their affairs, or
• qualifies and receives certain benefits such as:
- increased allowance, or
- attendance allowance,
- care component of disability living allowance at the highest or middle rate, or
- mobility component of disability living allowance at the higher rate, or
- personal independence payment, or
- armed forced independent payment.
What classes as a ‘mental disorder’?
The term ‘mental disorder’ referred to above also has conditions attached to it. It is understood that the HMRC will accept certain conditions as a ‘mental disorder’ that enable a person to qualify, and as a result of the condition they are incapable of managing their affairs.
The accepted conditions are as follows:
• Alzheimer’s or other forms of dementia;
• bipolar disorder, schizophrenia, depression, or other mental illness;
• Autistic Spectrum Disorder;
• a learning disability, such as Down’s Syndrome.
• Some brain injuries if the injury has caused psychological, cognitive or behavioural disorder.
What about other beneficiaries?
If there are other beneficiaries in your trust who are not vulnerable, then the assets and income for the vulnerable beneficiary must be identified and kept separate. They must only be used for that person. It is only that part of the trust that would be entitled to special tax treatment.
In addition to the beneficiary meeting the above definition of ‘disabled’, the trust itself must be a ‘qualifying trust’. This means that there must be certain restrictions on who can receive benefits from the trust during the disabled person’s lifetime.
These are as follows:
- Any capital leaving the trust must be used for the benefit of the disabled person.
- The disabled person must either be entitled to the trust income, or, if the trustees have discretion as to if and when the income is paid out, then any income payments must be for the benefit of the disabled person during their lifetime.
Although other beneficiaries can be listed as a potential beneficiary of the trust, the trustees are limited as to how much the other beneficiaries can receive, currently being the lower of £3,000 per tax year or 3% of the maximum value of the trust fund.
Income tax
For income tax purposes, any income received by the trust will be taxed at the vulnerable persons’ rate. Trusts normally pay income tax at the rate of 45%. This enables the trust to take into account the beneficiary’s personal allowances and means that income tax will likely be charged at the a marginal rate of tax.
Capital gains tax
Capital gains tax is usually paid when assets are sold, given away, exchanged or and their value has increased since they were put into the trust. There is an annual exempt amount allowed for the trustees to set against capital gains in the trust.
Trusts are entitled to half the usual personal annual exemption. As with the income tax calculations for these trusts, any gains are calculated by reference to the vulnerable persons’ rate making use of the full individual personal allowance.
Inheritance tax
Vulnerable persons’ trusts do not fall into the ‘relevant property regime’ which operates in such a way that inheritance tax may be payable when assets enter the trust, on 10-year anniversaries, or when assets are paid out of the trust.
However, the value of the trust will aggregate with the disabled person’s own estate for IHT purposes on their death, whereas a discretionary trust would not. If the value of the trust is significant, it could have inheritance tax implications.
For inheritance tax purposes only, a ‘disabled person’ also includes a person who settles their own property into a trust for themselves at a time when they have a condition that it is reasonable to expect will lead to them becoming incapable of administering their property or managing their affairs (this can often happen for someone who may have an acquired brain injury as a result of an accident).
How do you claim the special tax treatment?
If the trustees of the vulnerable beneficiary trust wish to claim the special tax treatment for income tax and capital gains tax purposes, they will have to complete the ‘Vulnerable Person Election Form VPE1’ every tax year.
Administration
All trusts need to be properly administered. This usually involves the trustees registering the trust with HMRC’s online Trust Registration Service, filing annual Tax Returns and issuing appropriate tax deduction certificates to beneficiaries who have received income (R185s). The trustees should also maintain trust accounts and properly manage the trust’s property or investments.
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