On Budget day, 22 March this year, the Government proposed – without prior consultation – the most far-reaching changes to inheritance tax in a generation. Their intention seems to be to exclude trusts for disabled people from the scope of the new tax charges to be levied on most other types of trust. But the definition of disabled person used for this purpose, substantially unaltered for more than 20 years, is so narrowly framed as to leave many disabled beneficiaries of trusts out in the cold.
While the rest of government forges ahead in its understanding of disability issues, with the Disability Discrimination Acts 1995 and 2005 ushering in a new age of inclusion, the tax system clings obstinately to ancient precedents.
The nature of the problem
The tax definition of disabled person covers a person who is incapable, by reason of mental disorder, of administering their property or administering their affairs; or a person in receipt of attendance allowance, or the highest or middle rate of disability living allowance care component. The latter part of the definition also now extends to people with an underlying entitlement to those benefits but who cannot claim them because they are in hospital or living in paid-for accommodation. ‘Mental disorder’ is defined by reference to the Mental Health Act 1983.
The problem with this definition is twofold.
First, the link with the Mental Health Act 1983 is inadequate to deal with people who have partial, fluctuating or diminishing mental capacity – people with a diagnosis of Alzheimer’s or Parkinson’s disease, for example, or of schizophrenia.
In response to lobbying, the Government has adopted an amended definition which enables some people in this situation to set up a trust for themselves, but still makes it difficult for others to set up a trust on their behalf. The Government has rejected the preference of a coalition of mental health charities to refer to more up-to-date legislation.
Secondly, trusts are often used to support other vulnerable beneficiaries. Another arm of Government, the social security system, recognises payments from such entities as the Macfarlane Trusts, the Eileen Trust and the Independent Living Funds and disregards them when assessing benefits entitlement. Trust funds created from payments for a personal or criminal injury are also disregarded.
Small comfort that is when funds set aside for the care needs and living expenses of disabled beneficiaries for the rest of their lives risk being depleted by unexpected and unforeseen tax charges intended to catch super-rich avoiders. LITRG regards it as grossly unfair that innocent benefits claimants should be caught in the cross-fire.
Two years ago, Disability Alliance made a similar point to the then Inland Revenue in response to a different consultation exercise.
‘The proposals to restrict eligibility to those [covered by the current definition] appears to be far too restrictive and would exclude many disabled people who are currently defined under social security legislation. In this regard it would not appear to fit in with the government’s proposal of fairness.’
The last chance
The final opportunity to put these matters right comes when the Finance Bill receives its third reading on Tuesday and Wednesday 4 and 5 July. We urge the Government to reconsider, otherwise this once-in-a-generation opportunity to bring the tax definition of disabled person up-to-date and into line with the rest of Government thinking on disability will have been missed.
More background information
See our earlier article on this topic for a discussion of trusts and how they can be used for the benefit of disabled people.
Contact: Robin Williamson (Tel: 0844 579 6700 Fax 0844 579 6701)