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5 min read 1 Mar 22
The UK tax code usually refers to trusts for “vulnerable beneficiaries” rather than trusts for the disabled.
A ‘vulnerable beneficiary’ is either:
This article only deals with a person who is mentally or physically disabled.
They are eligible for any of the following benefits (even if they don’t receive them):
If a trust is set up for a vulnerable beneficiary, the trustees can claim special treatment for income tax and capital gains tax (CGT) if it is a ‘qualifying trust’.
For a trust to be 'qualifying’ (relating to income tax and CGT. There is a separate criteria for inheritance tax (IHT) – outlined below), its assets must only be capable of being used to benefit a disabled person (there is though very limited scope for others to benefit). The disabled person must be entitled to all the income or, if they are not so entitled (because there is no interest in possession), none of the income can be applied for the benefit of anyone else. If only part of a particular trust meets the vulnerable person criteria, then the special income tax treatment may only apply to that part if it is held in a separate fund or in some other way as a defined part.
To claim special tax treatment for income tax and CGT, the trustees must complete form VPE1 (Vulnerable Person Election) and send it to HMRC.
The trustees must sign VPE1 along with the vulnerable beneficiary (or with someone who can legally sign for the beneficiary).
A separate form VPE1 must be completed for each beneficiary.
The special tax treatment takes effect from the date provided (elected for) on form VPE1. The election must be made no later than 12 months after 31 January following the tax year when it is to start.
Any income or gains before the election takes effect are taxed under normal trust rules – even if the election takes effect part way through the same tax year.
The special tax treatment is no longer effective after the death of the vulnerable beneficiary or the date on which the vulnerable beneficiary ceases to be vulnerable.
Where a trust has a vulnerable beneficiary, the trustees are entitled to a deduction of tax against the amount they would otherwise pay.
This is calculated as follows:
CGT is payable by the trustees. They can claim a relief calculated in a similar way to the income tax relief:
This special treatment does not apply in the tax year when the beneficiary dies.
Trusts for vulnerable beneficiaries get special inheritance tax treatment if they are ‘qualifying trusts’.
A qualifying trust for a disabled person is one where:
There’s no IHT charge:
When the beneficiary dies, any assets held in the trust on their behalf are treated as part of their estate and IHT may be charged. Although it’s a discretionary trust, for IHT purposes, the disabled beneficiary is treated as having an Interest in Possession. No 10 yearly or exit charges apply but instead an IHT charge arises when the beneficiary dies or if the trust comes to an end during their lifetime.
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