Disabled Persons Trust

A Disabled Person’s Trust is a trust specifically designed for someone who is defined as “disabled” and offers favourable tax treatment for Inheritance Tax, Capital Gains Tax and Income Tax.

These trusts are a great way of making provision for a disabled person without impacting the person’s means tested benefits or leaving them vulnerable to financial abuse in the future – as the money will be held under the protection of the Trustees.

These trusts are usually created by Will and will not arise where someone dies Intestate (without a valid Will). A Disabled Person’s Trust can provide peace of mind to clients knowing that their loved one will be provided for following their death.

Who Qualifies As A Disabled Person?

For tax purposes, a person is classed as disabled if one or more of the following applies:

  • They are incapable of managing their affairs or property due to a mental disorder as defined by the Mental Health Act 1983.
  • They are receiving Attendance Allowance, DLA, PIP, an increased Disabled pension, constant Attendance Allowance; or Armed Forces independent payment; or
  • They would be entitled to receive any of the above but fail to have a residence in the UK or are a resident in a care home, hospital, prison.

Types Of Trust

In simple terms, a trust is a legal “wrapper” to hold assets. The Donor (or Settlor) creates a trust by giving property to Trustees who hold the property on behalf of one or more persons (referred to as the beneficiaries).

There are many different types of trust including Discretionary Trusts and Interest in possession trusts. With Discretionary Trusts, Trustees choose whether and to whom (from a list of beneficiaries set out by the Settlor) to pay out income which means that a beneficiary has a hope of receiving funds as opposed to an absolute right to receive funds. In an Interest in possession trust, trust income will be paid to the beneficiary as of right, i.e. they have an absolute right to that income.

It is important that if a Disabled Person’s Trust has been included in your Will that you keep it under review, as it is possible for the disabled person to fall out of the definition of a ‘disabled person’ if they are no longer in receipt of the prescribed benefits, or if they regain mental capacity

What Is The Role Of The Trustees?

The role of the Trustees will be to consider making payments out of income and capital to the disabled person throughout their lifetime. It is possible (and prudent) to include provision for any money left in the trust on the disabled person’s death to be paid to a charity or other individuals (who do not need to be disabled themselves) as default beneficiaries.

What Are The Tax Implications Of A Trust?

The Trustees, as legal owners of property, are liable to pay income tax on the income arising from the trust property, and Capital Gains Tax on any gain deriving from any sale or the disposal of the property.

Where a Trust beneficiary is disabled or vulnerable, the Trustees may sometimes get special tax treatment provided certain conditions are satisfied about the nature of the trust and the circumstances of the beneficiary. Broadly speaking, the special tax treatment aims to tax the income and any gains of the trust in the same way as if the individual beneficiaries’ own allowances, release and rates applied. Essentially, the aim is to reduce the tax payable by the Trustees out of the trust so that the funds are preserved in the trust for the benefit of the disabled person.

Capital Gains Tax & Inheritance Tax Reliefs

A disabled person trust may also have other taxable benefits.

Capital Gains Tax – The trust may have a full capital gains tax allowance as opposed to the half allowance which is normally available to trusts. To qualify for this the trust must secure that the disabled person must be entitled to at least half of the income of the trust or there needs to be a right that no other beneficiary can receive the income.

Vulnerable Beneficiary Election – The trustees and the disabled person could make an irrevocable vulnerable person election and then the trustees could make an annual claim for a tax rebate. The effect of this election would be that the trustees would pay tax at the rate applicable if the income had arisen directly to the disabled person. For income tax purposes the trustees would pay the same rate of tax as the disabled person would have paid. Once again, the qualifying criteria are strict and it may be necessary to ring fence trust assets to which it may apply.

Is There Another Option?

There is the option of setting up a discretionary trust in lifetime which does not have any of the tax benefits described above and will attract ten yearly charges and exit charges for inheritance tax purposes. This type of arrangement can benefit a disabled person but also other children, family members etc. with no restrictions as to the income and capital to be applied for the benefit of the disabled person.

If capital is released to the disabled person then this will affect benefits payable. Items can be bought from the trust for the benefit of the disabled person (not for resale) but these have to be reasonable to not affect the benefits. What is reasonable is open to interpretation. If the trust fund is likely to be below the threshold for inheritance tax (currently £325,000) this may be a more favourable option to take.

For further information regarding the above or if you would like to discuss a Wills & Probate related query with one of the team, please call us on 0800 011 6666 or e-mail the team at legal@timms-law.com.