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Updated on 6 April 2023

Trusts for disabled people

We look at the special tax rules that can sometimes apply when a trust is created for the benefit of a disabled person.

Content on this page:

Introduction

A trust for the benefit of a disabled person might be set up for a variety of reasons, for example:

  • the disabled person may not (or may not always) be able to manage their own finances;
  • an individual may wish to set aside funds for the disabled person, but retain control (via the trust deed) of what happens to the fund, for example in the event the disabled person marries or dies.

A trust such as this may be set up by:

  • A parent or other relative who sets up a trust for a child or other relative.
  • An individual may set up a trust for themselves if they think they may need that protection in the future.
  • An individual may set up a trust to receive compensation monies (for personal injury, for example).

Getting professional advice

Trusts are a complex area and, in particular, the tax rules for disabled persons trusts are not straightforward. There are some complex and strict conditions for the special rules to apply. We recommend you get competent professional advice when setting up or administering a trust for someone with a disability. Such advice might be taken from a:

You will also need to think about the impacts of a trust on the disabled beneficiary's benefits entitlement. In general, this will depend on the type of trust and the type of benefits. Ask any advisers you approach if they are able to cover these aspects as well.

The information that follows is intended purely as a brief outline of the tax rules and not in any way a substitute for proper professional advice. It is also restricted to trusts and beneficiaries resident in the UK.

Disabled person’s trusts

A disabled person’s trust can be any sort of trust where there is at least one beneficiary who is a ‘disabled person’. There are various conditions which must be satisfied to qualify as a disabled person’s trust, both in terms of who counts as a disabled person, and how the trust fund is used.

Where a trust qualifies as a disabled person’s trust, special rules apply. These can result in more favourable tax treatment than would apply to other trusts.

Disabled persons

For the trust to qualify as a disabled person’s trust, there must be a beneficiary who is disabled at the time assets are settled (transferred) into the trust. This is subject to a small exception for inheritance tax purposes only, where the person makes a trust for themselves because they are likely to become disabled in the future. 

For these purposes, a disabled person is a person who falls into any of the following situations:

  • A person incapable of managing their property due to a mental disorder within the meaning of the Mental Health Act 1983
  • A person in receipt of an attendance allowance
  • A person in receipt of a disability living allowance by virtue of entitlement to the care component at the highest or middle rate or the mobility component at the higher rate
  • A person in receipt of personal independence payment
  • A person in receipt of an increased disablement pension
  • A person in receipt of a constant attendance allowance
  • A person in receipt of an armed forces independence payment

A person can still qualify as a disabled person for these purposes if the only reason they are not in receipt of one of the above benefits is due to one of the following situations:

  • they are not resident or present in the UK
  • they are undergoing treatment in a hospital or similar institution for renal failure
  • they are residing in a care home where the cost of their accommodation, board and personal care is borne out of public funds
  • they are serving a prison sentence

Non-disabled beneficiaries

It is not strictly necessary for a disabled beneficiary to be the only beneficiary of the trust. There could be other non-disabled beneficiaries. However, for a disabled person’s trust to qualify for favourable tax treatment, trustees are only allowed to apply trust capital or income for the benefit of non-disabled beneficiaries subject to an annual limit, being the lower of:

  • £3,000, or
  • 3% of the maximum value of the trust fund.

It is important when creating a disabled person’s trust with non-disabled beneficiaries to ensure that the trust deed correctly reflects the restrictions on using the fund for the benefit of non-disabled beneficiaries. This is another reason why it is essential to take professional advice.

Tax treatment

Where there is a qualifying disabled person’s trust, there are certain favourable tax rules that may apply. There are different rules for:

  • income tax and/or capital gains tax; and
  • inheritance tax.

Income tax and capital gains tax

The scope of these special rules for income tax and capital gains tax includes trusts not only for disabled beneficiaries but also for beneficiaries under the age of 18 at least one of whose parents has died. Sometimes these rules are therefore said to apply to ‘vulnerable beneficiaries’ as they apply to a broader range of people than just disabled people.

Here we only consider the special rules as they apply to trusts with disabled beneficiaries, hence our use of the term disabled person’s trusts rather than ‘trusts for vulnerable beneficiaries’, which is their official name. 

Where there is a qualifying disabled person’s trust, the trustees can ask for the trust’s tax on income and capital gains to be calculated as if the assets belong to the disabled beneficiary.

The income tax and capital gains tax rates and allowances for trusts are generally less favourable than those applied to individuals. Therefore, the idea is that these special rules remove the disadvantage of higher tax liabilities where property is held in trust for the benefit of a disabled person.

To calculate the tax relief available (and for the trustees to decide whether it is beneficial to make such a claim for such relief), some fairly complex calculations must be prepared. You can read more about the calculations on GOV.UK. Competent professional advice is needed to carry out any of the calculations to determine the lowest overall tax charge. 

Please note, if the settlor of the trust can benefit from the trust, then the special income tax rules cannot apply. However, the special capital gains tax treatment can still apply in this case.

Elections

There are two steps to getting the special treatment described above:

  1. If both the type of trust and beneficiary qualify as described above, the trustees and the beneficiary can jointly make a ‘vulnerable person election’. This election must be made within 12 months of the normal filing deadline for the tax return when it is first to have effect (so for the 2022/23 tax year the normal filing deadline is 31 January 2024, so the deadline for the election would be 31 January 2025). It is irrevocable but has no effect unless a further election is made, as described below.
  2. Once the vulnerable person election has been made, as above, this allows the trustees to decide each tax year whether to make an election for special tax treatment. Normally the trustees would make this election in the trust’s tax return, but it can be made at any time up to 5 years from 31 January following the end of the relevant tax year.

Vulnerable person elections

A vulnerable person election is made by completing form VPE1. This form can be completed on screen, but will need to be printed so that both the trustees and the disabled beneficiary can sign the election, before it is posted to HMRC. If the trustees are unable to complete the online form, a paper form can be obtained from HMRC by calling the trusts helpline.

The disabled person may not be able to sign the election or lack capacity to do so. In these circumstances the election should be signed by the person properly appointed under a power of attorney or, failing that, the person appointed by court to deputise for them.

As noted above, the deadline to make the vulnerable person election is 12 months after the 31 January following the end of the tax year in question. Once made it is irrevocable, but it comes to an end if the beneficiary ceases to be a vulnerable person, or the trust ceases to qualify or comes to an end.

Inheritance tax

We have already discussed above what the requirements are to qualify for special treatment as a disabled person’s trust, but as a brief reminder:

  • the disabled person must meet the definition of disabled as set out above, and
  • the trust income or capital must not be applied for a non-disabled beneficiary other than to a minimal extent (being £3,000 or 3% of the fund if lower).

On some occasions, a person might not be ‘disabled’ when the trust is created, but has a medical condition where it is reasonably likely that they will become disabled at a later date. If this is the case, then for inheritance tax purposes only, the trust may still qualify for treatment as a disabled person’s trust from the beginning.

This special extension only applies in cases where a beneficiary is settling a trust for themselves, sometimes referred to as ‘self-settling’. It is, therefore, of no use where the assets being settled into trust belong to someone other than the intended beneficiary. For example:

  • If the parents of a child with a degenerative condition (but does not currently meet the definition of ‘disabled’) wish to place property into trust for the benefit of that child later in life, then at the point the trust is created, the trust will not qualify as a disabled person’s trust for any tax purposes.
  • If a person is diagnosed with a degenerative condition (but again is not currently disabled) and wishes to self-settle cash into a trust for themselves while they still have capacity to do so, then the trust will qualify as a disabled person’s trust for inheritance tax purposes only, subject to other conditions being met.

As long as a trust meets the necessary conditions, the assets of the disabled person’s trust are treated for inheritance tax purposes as though the beneficiary owns the assets directly. This means that the usual inheritance tax rules for trusts do not apply.

Therefore:

  • If the settlor sets up a trust for a disabled beneficiary during their lifetime, the trust will not face the usual inheritance tax charge of 20% on assets entering the trust in excess of the settlor’s nil rate band.
  • The transfer to the trust will instead be treated as a ‘potentially exempt transfer’ (PET). This means that inheritance tax will only be payable if the settlor dies within seven years of the transfer.
  • If the trust is established on the settlor’s death (for example under their will) inheritance tax will have to be paid as appropriate on the settlor’s estate before the transfer into the trust – there are no special rules to reduce or remove the inheritance tax charge on death.
  • If the trust was self-settled by the disabled person (or by a person who is likely to become disabled), then the transfer into trust will be a ‘non event’ for inheritance tax purposes – the transfer will not be considered a PET as the assets will have been part of the settlor’s estate both before and after the transfer into trust, so there is no ‘transfer of value’.
  • Regardless of whether the trust was set up on the settlor’s death, or during their lifetime, or indeed whether the trust was ‘self-settled’, disabled person’s trusts are not subject to ongoing ten-year anniversary charges or exit charges if capital is paid out of the trust. You can read more about these charges on GOV.UK.

When the disabled beneficiary dies, the assets of the trust will form part of their estate for the calculation of inheritance tax. However, the proportion of any inheritance tax that relates to the assets of the trust will be payable by the trustees, not from the disabled person’s personal assets.

Trust registration service

Most trusts need to be registered under the trust registration service (TRS). However, there is a specific exemption from registering under the TRS for non-taxable disabled person’s trusts. You can read more about the TRS in our separate guidance.

Further information

You can find the government’s guidance on different types of trusts and their tax consequences on GOV.UK.

For more information on trusts for vulnerable beneficiaries generally, you could look at HMRC’s manuals.

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