Trusts for Vulnerable People

There are a number of reasons as to why you may wish to settle assets in trust, but one of the most prominent is to protect family wealth and to look after the long term interests of family members.

by Anna Murdock

Head of Wealth Planning


A trust can be a particularly useful tool to provide financial stability for a vulnerable person throughout their lifetime. Some trusts for disabled people or children get special tax treatment. These are called ‘trusts for vulnerable beneficiaries’. It is important to differentiate between what you may deem vulnerable and what is classed as vulnerable in terms of the applicable law where preferential tax treatment can be applied.

Who qualifies as a vulnerable beneficiary?

A vulnerable beneficiary is either someone under 18 whose parent has died or a disabled person who is eligible for any of the following benefits (even if they do not receive them):

  • A person incapable of managing their property due to a mental disorder; - A person in receipt of an attendance allowance, disability living allowance or 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

For the trust to qualify as a disabled person’s trust, the person must be disabled at the time property is transferred to the trust. 

It is important to differentiate between what you may deem vulnerable and what is classed as vulnerable.

Mental disorder

HMRC accept the following conditions will count as a ‘mental disorder’ and enable a person to qualify as disabled, if as a result of having the condition they are incapable of managing their affairs if the condition lasts, or is expected to last, for more than 12 months:

  • Alzheimer’s or other forms of dementia
  • Bipolar disorder, schizophrenia, depression or other mental illness.
  • In addition, those with the following conditions may qualify as having a mental disorder if as a result of the condition they are incapable of managing their affairs: Autistic Spectrum Disorder or learning disability, such as those with Down’s syndrome. 

For the trust to qualify as a disabled person’s trust, the person must be disabled at the time property is transferred to the trust.

Why might a trust be set up for a disabled person?

A trust might be set up for a variety of reasons including: -

  • 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 in the event the disabled person marries or dies, for example
  • It might protect the disabled person’s entitlement to means-tested state benefits.

Who might set up a trust for a disabled person?

  • 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).

Preferential tax treatment 

A disabled person’s trust is one that is set up to conform with the requirements of section 89 Inheritance Act 1984. Broadly, such a trust avoids some of the harsher tax consequences of a trust.

The special tax treatment broadly aims to tax the income and gains of the trust in the same way as if the individual beneficiary’s own allowances, reliefs and rates applied to the trust income and gains; and to ensure that for inheritance tax the 10-yearly tax charges that affect most other trusts do not apply. 

Crucially, the income tax and capital gains tax reliefs are not automatic. The trustees need to take action, sometimes along with the beneficiary (or their parent or attorney). If the trust was settled by the beneficiary for themselves, no income or capital gains tax relief will be available.

If the trust was settled by the beneficiary for themselves, no income or capital gains tax relief will be available.

Of the tax benefits available, particular note should go to the deduction in income tax liability. As an example, the trustees would firstly work out what the trust income tax would be if there was no claim for special treatment, after which they would work out the income tax the vulnerable beneficiary would be liable to pay should the trust income have been paid directly to them as an individual. The trustees then claim the difference between the two figures as a deduction from their own income tax liability.

The same process applies when working out the relief available for capital gains tax on a disabled persons trust, but it is important to remember that the trust also benefits from an increase in the capital gains tax allowance from what would ordinarily be offered to trustees (i.e. an increase from £6,150 to £12,300).

Ordinarily, trusts have 10 year inheritance tax charges of 6% on the excess above the nil rate band.

In addition there are situations when trusts for vulnerable people get special inheritance tax treatment. Ordinarily, trusts have 10 year inheritance tax charges of 6% on the excess above the nil rate band (i.e. 6% on excess over £325,000), but trusts with vulnerable beneficiaries are usually exempt.

Claiming special tax treatment

To claim special treatment for income tax and capital gains tax, the trustees have to fill in the ‘Vulnerable Person Election’ form. If the vulnerable person dies or is no longer vulnerable, the trustees must tell HMRC.

Trusts for Vulnerable People are a complex area and professional legal advice should be sought if you are considering setting up such a trust.


The information provided in this article is of a general nature. It is not a substitute for specific advice with regard to your own circumstances. 

Illustration by Adam Mallett

 

Planning for your financial future

Wealth planning services

Understanding Finance

Helping clients understand what we do is key to building relationships. To explain some of the industry jargon that creeps into our world, we’ve pulled together a section of our site to help.


Also in this issue

As many readers will know, we conducted a client survey in the summer of 2021, our third such survey, in order that we get a better understanding of how our clients feel we are meeting their goals.  

In the early summer of this year, we saw a huge surge in retail sales across the world with growth close to four times what is normal.

We met the companies below and you can learn more on any of these by contacting the person at JM Finn with whom you usually deal.

Winter Issue Thirty Seven