Trusts for vulnerable people, also known as trusts for vulnerable beneficiaries, are a type of trust that can be set up for:
- someone under eighteen whose parent(s) have died.
- a disabled person who is eligible to receive a Personal Independence Allowance, Constant Attendance Allowance, or Armed Forces Independence Payment, even if they don’t receive any of these allowances.
Trusts, as we’ve been exploring in recent weeks, are a method of organising money, investments, land, or buildings (known collectively as assets) for a person or group of people, including children. But how are trusts for vulnerable people different from standard trusts, if at all?
Vulnerable Person Tax Treatment
In order for a beneficiary to be treated as a ‘vulnerable person’ for trust tax purposes they have to fill in, with help, if necessary, the Vulnerable Person Election (VPE1) form. The form must be signed by both the beneficiary and the trustee(s).
Income Tax Treatment
Trusts with a vulnerable beneficiary may receive a deduction in income tax payments.
To work out this deduction, the trustee(s) must calculate what tax would be payable if there was no deduction available, before calculating what income tax the vulnerable beneficiary themselves would have owed if the income from the trust had been paid to them as an individual. The difference between these two figures can be deducted.
Capital Gains Tax Treatment
Capital Gains Tax is only paid when assets within a trust with a vulnerable beneficiary are sold, transferred, exchanged, or given away, and the assets in question have increased in value above the ‘annual exempt amount’.
This figure currently sits at £11,100 for beneficiaries with a mental or physical disability, and £5,550 for others.
Inheritance Tax Treatment
Trusts for vulnerable people may get special tax treatment depending on their level of vulnerability, as defined by HM Revenue and Customs (HMRC), when the trust was set up, and how long the person who set up the trust continues to live after the trust is created.
These definitions are highly specific, so rather than restating the same information here we recommend you read through the different cases the Government have put forward here (scroll down to the ‘Inheritance Tax’ section).
Keep in mind: It’s possible for a trust to have multiple beneficiaries who are and aren’t deemed to be vulnerable people.
For this reason, and to keep everything above board, all income and assets for any vulnerable beneficiaries must be kept separate from income and assets for non-vulnerable beneficiaries, with only the vulnerable beneficiary’s income and assets being eligible for any special tax treatment.
When a vulnerable beneficiary dies or is no longer deemed to be vulnerable, the trustee(s) must inform HMRC as soon as possible.
Experienced Trust Accountants
To speak with a professional accountant to discuss trusts for vulnerable people, or for anything else, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.