Disabled & Vulnerable Persons Trusts
Disabled and Vulnerable Persons Trusts have more favourable Tax implications compared to their Discretionary cousins. If during the lifetime of the disabled person the income and capital will be used only for their benefit, the Trust will not incur any charges for Inheritance Tax and the ten yearly Inheritance Tax charges that are incurred by Discretionary Trusts will not apply
For Income Tax and Capital Gains Tax, the Trustees have to make an election to HM Revenue & Customs for favourable tax treatment. The effect of this is to have the income and capital gains taxed as if the Trust Fund belongs to the disabled person.
To claim special tax treatment for Income Tax and Capital Gains Tax Trustees must complete the Vulnerable Person Election form for each vulnerable beneficiary. If the vulnerable person ceases to be vulnerable or dies the Trustees must inform HMRC.
Why use a Vulnerable Persons Trust?
These kinds of Trusts are a powerful tool when used correctly, if the right criteria is met they help protect means tested benefits and support that beneficiaries may be in receipt of and help to protect vulnerability. As with full Discretionary Trusts it is wise for the testator to leave an expression of wishes. Whether or not the vulnerable beneficiary receives anything from the trust is at the Trustees’ discretion and therefore the trust should not be taken into account when the beneficiary’s entitlement to means tested benefits or support is assessed. The assets need to be used correctly by the Trustees; they should not be utilised to pay for things that means tested support is intended for such as utility bills as this could endanger a future claim for support. When it comes to protecting vulnerability, the Trustees’ are able to ensure that the beneficiary is not preyed upon by people with less than good intentions, for many parents who have disabled children this can be a very real fear and having a Disabled/ Vulnerable persons Trust in place alleviates much of their worries.
For the purpose of a Disabled or Vulnerable Persons Trust a person is defined as disabled or vulnerable is one or more of the following apply-
They are receiving at least one of the following benefits-
- Attendance Allowance
- Disability Living Allowance (DLA) based on entitlement to the care component at the highest or middle rate, or the mobility component at the higher rate
- Personal Independence Payment (PIP)
- They would be entitled to receive one of the above benefits but for being in a state-funded establishment, for example the beneficiary/ beneficiaries are in a care home, supported living accommodation or hospital.
- They would be entitled to receive one of the above benefits if they could satisfy prescribed conditions as to residence or presence in the UK.
- The intended beneficiary/ beneficiaries are incapable of administering their own property or managing their own affairs due to mental health disorder within the meaning of the Mental Health Act 1983.
If there’s more than one beneficiary
If there are beneficiaries who are not vulnerable or disabled, the assets and income for the vulnerable beneficiary must be:
- identified and kept separate
- used only for that person
Only that part of the Trust gets special tax treatment.