These Trusts can arise by Will or Deed of Variation, or they can be set up during the lifetime of the Settlor. These Trusts can grant the disabled person a life interest or be discretionary.
These Trusts are designed to protect the assets of disabled persons who are unable to manage their own affairs or who would otherwise be taken advantage of while protecting any means-tested benefits.
The definition of a ‘vulnerable person’ has changed and capital gains tax free uplift has been introduced for these types of Trusts.
A vulnerable beneficiary is defined as a person who is, by reason of mental disorder within the meaning of the Mental Health Act 1983 incapable of administering their property or managing their affairs.
A disabled person is someone who is eligible for any of the following benefits (even if they do not receive them):
- in receipt of Attendance Allowance (the mobility component at the highest rate)
- in receipt of a Disability Independence Allowance by virtue of entitlement to the care component at the highest or middle rate
- in receipt of Personal Independence Allowance
- in receipt of an increased disablement pension
- in receipt of Constant Attendance Allowance; or
- in receipt of Armed Forces Independence Payment
There are also provisions to ensure that, if a person would have qualified for one or more of the above benefits but for their residence in a hospital or care setting, they would still be able to qualify.
From 6 April 2014, people who are in receipt of the mobility component of disability living allowance at a higher rate or the mobility component of a personal independence payment at the standard or enhanced rate will also qualify.
These Trusts get special tax treatment. They will automatically qualify for Inheritance Tax exemption so there are no entry or exit charges. However, to obtain the Capital Gains Tax and Income Tax advantages, the Trustees will need to complete and submit a Vulnerable Persons Election VPE1 form to HMRC.
If this has been done, the Trustees do not need to pay the Trustee rate of income tax.
The balance in the Trust Fund on the death of the primary beneficiary falls into their Estate and will be taxed at 40% after taking in account any available Inheritance Tax allowance.
The rules on payments out of these Trusts have been greatly restricted. In the case of a discretionary Trust, as long as one half of the capital that was paid out was for the benefit of the vulnerable person, the Trust could continue to qualify.
Under the new rules, from 17 July 2013 only 3% of the Trust Fund or £3,000 in any given year, whichever is the lower, may be paid out for the benefit of somebody else. IPDI Trusts have been given the same restrictions.
For Trusts in place before 8 April 2013, the old rules will apply. Trusts arising under Wills that were executed before that date but that are replicated in a later Will or codicil can also continue to benefit from the old rules. Anything other than a direct replication will probably fail.