Disabled Person’s Trusts
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What is a ‘disabled person’s trust’?
A disabled person’s trust (DPT) is a legal arrangement that can be used to support a disabled person by protecting money and property for their benefit.
Trust arrangements can provide a protective framework from which disabled beneficiaries can benefit by being named in a class of potential beneficiaries. Legally, the funds or assets held in trust are held by the trustees. This means that the disabled beneficiary would not be required to manage or administer the assets or trust themselves. This also means that any means tested benefits would not be impacted.
Selecting Trustees
The choice of trustees is very important. As well as legally owning the assets in trust, they are responsible for managing and administering the trust. Anyone over 18 can be a trustee.
Discretionary Trusts
A disabled person’s trust usually operates in a similar manner to a discretionary trust and can be set up in your lifetime or in your Will.
However, the tax treatment is significantly different, and the use of these trusts is limited to situations where the primary beneficiary of the trust is deemed to be ‘disabled’.
A disabled person is one who:
- Due to ‘mental disorder’, within the meaning of the Mental Health Act 1983, is incapable of administering/managing their property or affairs, or
- qualifies for or receives certain benefits such as: attendance allowance; armed forces independence payment; mobility component (higher rate) or care component (middle or higher rate) of disability living allowance; personal independence payment.
What is a mental disorder?
Accepted conditions that could fall within the definition of mental disorder include Alzheimer’s or other forms of dementia; bipolar disorder, schizophrenia, depression, or other mental illness; autism spectrum disorder; learning disabilities, such as Down’s syndrome; and some brain injuries.
What about other beneficiaries?
If there are other beneficiaries who are not disabled, then the assets and income for the disabled beneficiary must be identified and kept separate and only used for them. It is only that part of the trust that would be entitled to special tax treatment as a trust for a vulnerable person.
In addition to the beneficiary meeting the above definition of ‘disabled’, the trust itself must be a ‘qualifying trust’. This means that during the disabled person’s lifetime: any capital must be used for their benefit; the disabled person must either be entitled to the trust income, or, if the trustees have discretion, then any income payments must be for the benefit of the disabled person during their lifetime.
Although other beneficiaries can be named as a potential beneficiary of the trust, the trustees are limited as to how much they can receive, currently being the lower of £3,000 per tax year or 3% of the maximum value of the trust fund.
Income tax
Any income received by the trust will be taxed at the vulnerable person’s rate.
Trusts normally pay income tax at a rate of 45%. This enables the trust to use the beneficiary’s personal allowances and means that income tax will likely be charged at a marginal rate of tax.
Capital gains tax (CGT)
CGT is usually paid when assets are sold or given away and their value has increased. There is an annual exemption allowed to set against capital gains in the trust.
Trusts are usually entitled to half of the personal annual exemption. For these trusts, any gains are calculated by reference to the vulnerable persons’ rate making use of the full individual personal allowance of £3,000 (for the 2024/25 tax year).
Inheritance tax (IHT)
Vulnerable persons’ trusts do not fall into the ‘relevant property regime’ which operates in such a way that IHT may be payable when assets enter the trust, on 10-year anniversaries, or when assets are paid out of the trust.
The value of the trust will be added to the disabled person’s own estate for IHT purposes on their death. If the value of the trust is significant, it could have IHT implications for the disabled person’s estate.
How to claim the special tax treatment?
The trustees will have to complete a ‘Vulnerable person election form (VPE1)’ every tax year.
Administration
All trusts need to be properly administered. This usually involves registering the trust with the Trust Registration Service, filing annual tax returns and issuing appropriate tax deduction certificates to beneficiaries who have received income (R185s). The trustees should also maintain trust accounts and properly manage trust property or investments by taking legal and financial advice.