Disabled Persons Trusts and IHT: Section 89 IHTA 1984 — No Periodic Charge, No Exit Charge
A qualifying disabled persons trust is exempt from both the 10-year periodic charge and the exit charge that apply to standard discretionary trusts. For families providing for a disabled child or family member, this saves a significant amount of IHT over the lifetime of the trust. The disabled person must be entitled to at least 50% of trust assets applied during their lifetime.
IHT Advantages and Key Rules
IHT advantage: no 10-year periodic charge
A qualifying disabled persons trust is not subject to the relevant property IHT regime. This means: (1) no 10-year periodic charge (which for a standard discretionary trust is up to 6% of trust assets above the NRB every 10 years); and (2) no exit charge when assets are appointed to the disabled beneficiary. For a family setting up a trust for a disabled child — funded with substantial assets to provide for their lifetime care — the exemption from periodic and exit charges can save a very significant amount of IHT over the trust's lifetime. A standard discretionary trust holding £500,000 in assets above the NRB would face a periodic charge of up to £30,000 every 10 years; a disabled persons trust with the same assets faces no periodic charge.
Qualifying conditions for the s89 disabled persons trust
To qualify for the s89 IHT exemption, the trust must meet the following conditions: (1) The trust must be established for the benefit of a disabled person — someone who, at the time the trust is established, is incapacitated by reason of mental disorder within the meaning of the Mental Health Act 1983; OR who is in receipt of an attendance allowance, disability living allowance (DLA at the middle or higher rate for care), personal independence payment (PIP), armed forces independence payment, or constant attendance allowance. (2) The disabled person must be entitled to not less than half of the trust property that is applied during their lifetime — the trust must not be structured so that the disabled person can be excluded from more than half of the trust property. (3) If the disabled person dies, the trust property must either pass to them (via their estate) or be distributed to other beneficiaries as directed — but during the disabled person's lifetime, they must receive not less than half the benefits.
Settlement by a disabled person themselves (self-settlement)
A disabled person can settle their own assets into a qualifying disabled persons trust — a self-settled disabled persons trust. This is particularly useful where a disabled person receives a compensation award (e.g. for personal injury) or an inheritance, and wishes to protect those assets from means-testing (for welfare benefits purposes) while also obtaining IHT efficiency. Normally, a person settling assets into a trust during their lifetime makes a CLT — potentially IHT at 20% above the NRB. However, where the settlor is the disabled person and the trust qualifies under s89, the settlement is not a chargeable lifetime transfer — the settled assets remain within the settlor's estate for IHT (there is no exit from the estate at the point of settlement). On the disabled person's death, the trust assets are included in their estate for IHT (with NRB and any available reliefs).
Third-party settlement: family members setting up a trust for a disabled person
Where a parent, grandparent, or other family member settles assets into a qualifying disabled persons trust for the benefit of the disabled person: (1) the initial settlement is a potentially exempt transfer (PET) — not a CLT — because the trust qualifies under s89; (2) if the settlor survives 7 years, the PET is fully exempt; (3) the trust is not subject to periodic or exit charges while it qualifies; (4) assets can be appointed from the trust to the disabled beneficiary without an exit charge. Parents of a disabled child commonly set up a discretionary trust in their will — with instructions that it should be operated as a qualifying disabled persons trust — to provide for the child after the parents' deaths without the IHT charges that would apply to a standard discretionary trust.
Income tax and CGT treatment of a disabled persons trust
A qualifying disabled persons trust is entitled to special income tax and CGT treatment: (1) Income tax: the trust's income is taxed at the basic rate (not the trust rate of 45%) — the same rate as if the disabled beneficiary had received the income personally. This avoids the trust income tax surcharge that applies to standard discretionary trusts. (2) CGT: the trust is entitled to the full annual exempt amount (the same as an individual) rather than the reduced trust annual exemption. This is significantly more favourable than a standard discretionary trust. These income tax and CGT advantages further increase the efficiency of holding assets in a disabled persons trust rather than a standard discretionary trust for a disabled beneficiary.
Frequently Asked Questions
What happens to the disabled persons trust when the disabled person dies?
When the disabled beneficiary dies, the trust assets are included in their estate for IHT — as if they had owned the assets personally. This is the trade-off for the absence of periodic and exit charges during the trust's lifetime: the assets are treated as part of the disabled person's estate at death, attracting IHT at 40% (subject to the NRB and any available reliefs). However, for many families, the IHT on death is a manageable cost compared with the periodic charges and exit charges that would apply over the lifetime of a standard discretionary trust, particularly where the disabled person has little other estate and their NRB is fully available.
Can the trust also benefit other people (e.g. siblings) while the disabled person is alive?
A qualifying disabled persons trust can have other beneficiaries — but the disabled person must be entitled to not less than half of the trust property applied during their lifetime. Trustees can distribute capital or income to other beneficiaries (e.g. siblings) provided this does not reduce the disabled person's entitlement below 50% of the trust property actually applied. In practice, many disabled persons trusts are structured so that the disabled beneficiary is the primary (or sole) recipient during their lifetime, with the residue of the trust passing to siblings or other family members on the disabled person's death. Careful drafting of the trust deed is required to ensure the 50% minimum entitlement condition is met at all times.
Does a disabled persons trust affect means-tested benefits?
Assets in a qualifying disabled persons trust may not be treated as the disabled person's capital for means-testing purposes — depending on how the trust is structured. A discretionary trust (where the trustees have discretion to pay or withhold benefits) is not typically treated as the disabled person's asset for benefits means-testing. A bare trust or one where the disabled person has an absolute entitlement to the trust assets would be treated as their asset. Local authority means-testing for care fees (under the Care Act 2014) and DWP means-testing for benefits each have their own rules on trust assets. Specialist welfare benefits advice is essential when setting up a disabled persons trust where the beneficiary receives means-tested benefits.
Can a s89 disabled persons trust be set up in a will?
Yes — a qualifying disabled persons trust can be established in a will, taking effect on the testator's death. The will trust is drafted with the qualifying conditions for s89 built in: the trust must be for the benefit of the disabled person, the disabled person must be entitled to at least 50% of the trust property applied during their lifetime, and the trust must not distribute to non-qualifying purposes during the disabled person's lifetime. The testator specifies the disabled person as the primary beneficiary and can include instructions about care, accommodation, and distribution. On the testator's death, the trust is funded from the estate and qualifies under s89 for IHT — no periodic charge and no exit charge on distributions to the disabled beneficiary.
What evidence is needed to show the beneficiary qualifies as 'disabled'?
To claim the s89 IHT treatment, the trustees must show at the time of the settlement (or, for a will trust, at the date of the testator's death) that the intended beneficiary meets the qualifying disability conditions: (1) they have a mental disorder under the Mental Health Act 1983; or (2) they are in receipt of a qualifying disability benefit (attendance allowance, DLA at the middle or higher rate for care, PIP daily living component at either rate, armed forces independence payment, or constant attendance allowance). Documentary evidence of the disability or benefit award should be retained — HMRC may request this when checking the trust's qualifying status on periodic charge returns or estate returns.
Providing for a Disabled Person? Your Will Must Get the Trust Structure Right
A disabled persons trust in your will can protect your disabled child or family member for life — without the IHT charges of a standard discretionary trust. WillSafe will kits help you document your intentions clearly. Seek specialist legal advice to ensure the trust deed meets the s89 qualifying conditions.
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