The Finance Act 2006 made major changes to the way in which trusts are treated for inheritance tax purposes, and was designed to make most trusts less appealing.
Trusts where the main beneficiary was a disabled person were exempt from the restrictions; the Government wished to encourage qualifying disabled beneficiaries and their families to use a trust structure to safeguard assets for the long term support of the disabled person. The trust could also be structured in such as way as to enjoy benefits for both income tax and capital gains tax. Trusts for the disabled have often been overlooked as a planning tool; they could suffer from some tax disadvantages and were complex to administer.
Following a review of this type of trust over the last two years, there have been changes which very much bring trusts for the disabled back onto the radar. Some new rules came into effect in April 2013 and, as part of the Autumn Statement, the Chancellor announced other concessions relating to the way in which trusts for disabled beneficiaries are taxed. Individuals wishing to make provision for a person suffering from mental or severe physical disability (or, in the latter case, individuals wishing to make provision for themselves) should therefore feel more encouraged to do so.
Trusts for disabled persons do not fall into the 'relevant property' charging regime introduced by the Finance Act 2006. They are therefore not subject to charges to inheritance tax (at a maximum rate of 6%) on each 10 year anniversary and when property leaves the trust between anniversaries. Transfers of property into trust also qualify for favourable inheritance tax treatment. The property in the trust will be aggregated with the beneficiary's personal assets for inheritance tax purposes when the beneficiary dies and there may be a charge to inheritance tax at that time, depending on the values involved. Changes announced by the Chancellor in the Autumn Statement mean that, on the death of the beneficiary, the trust property will also benefit from an uplift in value for capital gains tax purposes.
The definition of a 'disabled person' (a qualifying condition for the favourable tax treatment under this kind of trust) has also been widened. Previously the definition included, amongst others, anyone who was incapable by reason of mental disorder of administering their property or managing their affairs, or those who were entitled to the Disability Living Allowance (DLA) at the higher or middle rate, or the Personal Independence Payment (PIP) daily living allowance. The latest changes mean that those who are entitled to the DLA mobility allowance at the higher rate and the PIP mobility allowance will also qualify.
The Government has also committed to consulting further on ways to reform the tax treatment and administration of trusts for the disabled. It is hoped that this consultation will result in simplified tax compliance requirements which will make this kind of trust easier to run. Members of the Withers Elder Law Team formed part of the professional group consulted by the Government when the first tranche of changes to this type of trust were discussed. The group successfully lobbied for the first set of new rules relating to this type of trust to permit small amounts of the Trust Fund to be spent other than on the disabled beneficiary – for example, to provide respite leave for carers.
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