Disabled Discretionary Trust

A Disabled Person’s Trust is similar to a discretionary trust in that the trustees also have wide powers over how they manage the trust assets and use them. There is a big difference, however, which is that more advantageous tax rules apply to a disabled person’s trust.

A disabled person’s trust must benefit a person who is defined as:

• by reason of mental disorder, within the meaning of the Mental Health Act 1983, incapable of administering their own property or managing their own affairs; or
• in receipt of Attendance Allowance; or
• in receipt of Disability Living Allowance (DLA) by virtue of entitlement to the care component at the higher or middle rate; or,
• in receipt of Personal Independence Payment (PIP) at the standard or enhanced rate for ‘daily living activities’.

A Disabled Person’s Trust qualifies for reductions in income tax and capital gains tax. They also qualify for exemption from Inheritance tax in some situations. The trust must be one where:

• the trust was set up before 8 April 2013 and at least half of the payments from the trust go to the disabled person; or
• the trust was set up on or after 8 April 2013 and all payments go to the disabled person, except for up to £3,000 per year (or 3% of the assets, if that’s lower), which can be used for someone else’s benefit
• the trust was set up when someone who suffers from a condition that’s expected to make them disabled sets up a trust for themselves.

There’s no Inheritance Tax charge:

• if the person who set up the trust survives 7 years from the date they set it up
• on transfers made out of a trust to a vulnerable beneficiary

But it’s worth noting that when the beneficiary dies, any assets held in the trust on their behalf are treated as part of their estate and Inheritance Tax may then be charged.

Disabled person’s trusts are exempt from 10-year Inheritance Tax charges.

Which trust is best?

A Discretionary Trust is often more suitable where the tax implications are not likely to be a major consideration. Discretionary trusts are best where maximum flexibility is required to provide for several people in the family.

A disabled person’s trust is useful when tax is likely to be a major issue and there are no other family members who have financial needs.