Peterborough office
48 Broadway, Peterborough Cambridgeshire, PE1 1YW
01733 346 333 01733 562 338 enquiries@hegarty.co.ukStamford office
10 Ironmonger Street, Stamford Lincolnshire, PE9 1PL
01780 752 066 01780 762 774 enquiries@hegarty.co.ukOakham office
66 South Street, Oakham Rutland, LE15 6BQ
01572 757 565 01572 720 555 enquiries@hegarty.co.ukMarket Deeping office
27a Market Place, Market Deeping, PE6 8EA
01778 230 120 01778 230 129 enquiries@hegarty.co.ukIf you are, or you have a loved one who is suffering from a mental or severe physical disability, you may wish to look at the possibility of creating a Disabled Persons Trust to make provision for them.
Our solicitors can advise on planning that can be undertaken in lifetime to ensure that your loved ones are provided for after you are gone.
A trust is an arrangement designed to hold assets for the benefit of class of beneficiaries.
A trust for a disabled person is set up for the benefit of an individual who qualifies as a disabled person for tax purposes.
For tax purposes, a person is disabled if one or more of the following applies:
In simple terms, a trust is a legal “wrapper” to hold assets. The Donor (or Settlor) creates a trust by giving property to trustees who hold the property on behalf of one or more persons (referred to as the beneficiaries).
There are many different types of trust including Discretionary Trusts and Interest in possession trust. With Discretionary Trusts, Trustees choose whether and to whom (from a list of beneficiaries set out by the Settlor) to pay out income which means that a beneficiary has a hope of receiving funds as opposed to an absolute right to receive funds. In an Interest in possession trust, trust income will be paid to the beneficiary as of right, i.e. they have an absolute right to that income.
The Trustees, as legal owners of property, are liable to pay income tax on the income arising from the trust property, and Capital Gains Tax on any gain deriving from any sale or the disposal of the property.
Where a Trust beneficiary is disabled or vulnerable, the Trustees may sometimes get special tax treatment provided certain conditions are satisfied about the nature of the trust and the circumstances of the beneficiary. Broadly speaking, the special tax treatment aims to tax the income and any gains of the trust in the same way as if the individual beneficiaries own allowances, release and rates applied. Essentially, the aim is to reduce the tax payable by the Trustees out of the trust so that the funds are preserved in the trust for the benefit of the disabled person.
A disabled person trust may also have other taxable benefits.
The trust may have a full capital gains tax allowance as opposed to the half allowance which is normally available to trusts. To qualify for this the trust must secure that the disabled person must be entitled to at least half of the income of the trust or there needs to be a right that no other beneficiary can receive the income.
The trustees and the disabled person could make an irrevocable vulnerable person election and then the trustees could make an annual claim for a tax rebate. The effect of this election would be that the trustees would pay tax at the rate applicable if the income had arisen directly to the disabled person. For income tax purposes the trustees would pay the same rate of tax as the disabled person would have paid. Once again, the qualifying criteria are strict and it may be necessary to ring fence trust assets to which it may apply.
There is the option of setting up a discretionary trust in lifetime which does not have any of the tax benefits described above and will attract ten yearly charges and exit charges for inheritance tax purposes. This type of arrangement can benefit a disabled person but also other children, family members etc. with no restrictions as to the income and capital to be applied for the benefit of the disabled person.
If capital is released to the disabled person then this will affect benefits payable. Items can be bought from the trust for the benefit of the disabled person (not for resale) but these have to be reasonable to not affect the benefits. What is reasonable is open to interpretation. If the trust fund is likely to be below the threshold for inheritance tax (currently £325,000) this may be a more favourable option to take.
Where a lifetime gift into a trust is being considered and there is a concern that the donor (the person making the gift) may not survive the necessary seven year period for inheritance tax purposes consideration should be given to the availability of dependent relative relief to exempt the gift from inheritance tax.