Disabled Person's Trust and IHT UK 2026: s89 IHTA Qualifying Conditions, No Periodic Charges, Vulnerable Beneficiary Tax Relief, and Planning for a Disabled Child
A disabled person's trust under s89 IHTA 1984 avoids 10-year periodic charges and exit charges that apply to ordinary discretionary trusts. The qualifying disabled beneficiary must receive at least half of all distributions. VBTR election can also reduce income tax and CGT within the trust to the beneficiary's personal rates.
No Periodic Charges, No Exit Charges — But Only If the s89 Conditions Are Strictly Met
s89 IHTA 1984: a trust for a qualifying disabled person is treated as an interest in possession trust — NOT relevant property. No 10-year periodic charge (max 6% per 10yr). No exit charges on distributions. The disabled person must receive at least 50% of all distributions. Qualifying condition: mental disorder (MHA 1983 definition) OR receipt of DLA/PIP/Attendance Allowance/AFIP. DPT in a will qualifies for RNRB where home passes to disabled child. Vulnerable Beneficiary Tax Relief (VBTR): elect to tax trust income and gains at the disabled beneficiary's personal rates — potentially saving 25%+ income tax vs trust rate of 45%. Means-tested benefits risk: trust capital may count as disabled person's capital — pay for services directly, not cash.
| Aspect | Rule / Principle | Example / Scenario | Planning Guidance |
|---|---|---|---|
| What is a disabled person's trust and its IHT treatment? | DISABLED PERSON'S TRUST (DPT) — s89 IHTA 1984: a trust for the benefit of a disabled person that meets the qualifying conditions is treated for IHT as if the disabled person has an immediate interest in possession (IIP) in the entire trust property. THE CONSEQUENCE: the trust is NOT a relevant property trust. Therefore: (a) NO 10-year periodic charges under s64 IHTA (which charge up to 6% of trust value above NRB every 10yr); (b) NO exit charges under s65 IHTA when property leaves the trust; (c) the trust property IS treated as part of the disabled person's estate for IHT purposes (s49(1) IHTA — the interest in possession holder is treated as beneficially entitled to the trust property). THIS IS DIFFERENT FROM AN ORDINARY DISCRETIONARY TRUST: an ordinary discretionary trust (used for children's trusts, multi-beneficiary trusts) is relevant property — subject to periodic and exit charges. A disabled person's trust avoids all these charges. WHY IS THE DPT TREATED AS AN IIP? The rationale: a trust for a disabled person is intended for the long-term care and benefit of a vulnerable individual. The IHT system treats the disabled beneficiary as if they beneficially own the trust property (an IIP position) — reflecting the beneficial purpose of the trust. WHAT HAPPENS ON THE DISABLED PERSON'S DEATH: if the trust property is treated as part of the disabled person's estate for IHT (via the s49(1) IIP fiction), it will form part of their estate on death — subject to IHT at death on the disabled person's estate (which may include: the trust property; the disabled person's own direct assets; any NRB/RNRB available to the disabled person). IMPORTANT: the disabled person's estate benefits from their own NRB and RNRB on death. The trust property included in their estate is taxed at the death rates — but the favourable treatment versus a discretionary trust is the avoidance of periodic charges during the trust's life. | DPT vs ORDINARY DISCRETIONARY TRUST — IHT COMPARISON: a parent leaves £1m in trust for their disabled child Daniel (aged 30; qualifying disability). OPTION A (ORDINARY DISCRETIONARY TRUST): the £1m is on discretionary trust. Every 10yr: 10-yr charge = approx. 6% × (£1m − £325k NRB) = 6% × £675k = £40,500. Over Daniel's lifetime (say 40yr): 4 × £40,500 = £162,000 in periodic charges. Exit charges on distributions: additional charges whenever trust capital is paid to Daniel or others. Total IHT cost over Daniel's lifetime: potentially £162k+ in periodic charges alone. OPTION B (DISABLED PERSON'S TRUST — s89 IHTA): NO periodic charges. NO exit charges. The £1m is treated as if Daniel has an IIP. IHT only on Daniel's death (at death rates on Daniel's estate). SAVING: potentially £162k+ in periodic charges avoided over Daniel's lifetime. WHY THIS MATTERS: for long-lived disabled beneficiaries, the saving is significant. The DPT is clearly superior to an ordinary discretionary trust where the beneficiary qualifies as a disabled person. | WHEN TO USE A DPT: (1) PARENTS OF DISABLED CHILDREN: the most common use — a parent establishes a trust (by will or lifetime settlement) to provide for a learning-disabled, physically disabled, or mentally ill child. The child is likely to outlive the parent; the trust needs to run for decades without periodic charges eroding the fund. (2) WILLS FOR DISABLED CHILDREN: a will can create a DPT for any child (not just a minor) who is disabled. The DPT in the will creates the trust on the testator's death. s144 IHTA reading-back (if the will creates an initial discretionary trust) can be used to convert to a DPT within 2yr. (3) LIFETIME SETTLEMENT: a parent can settle assets into a DPT during their lifetime. The settlement is a CLT (to a trust — not a PET; IHT at 20% on the excess above the NRB). But: no periodic or exit charges thereafter. The lifetime CLT charge may be preferable to the ongoing periodic charges of an ordinary discretionary trust. (4) SELF-SETTLEMENT — s89B IHTA: from 22 March 2006, a disabled person can self-settle a DPT (creating a trust of their own assets for their own benefit). A self-settled DPT is NOT a CLT (it is an IIP settlement by the disabled person — exempt from CLT treatment). The disabled person's own estate includes the settled assets (IIP treatment); no periodic charges. Useful for a disabled person who inherits a sum of money and wants to protect it without periodic trust charges. |
| Qualifying conditions for s89 IHTA disabled person's trust | THE FIVE QUALIFYING CONDITIONS FOR A DPT (s89 IHTA 1984): (1) THE DISABLED PERSON CONDITION: the settled property must be held on trust for a person who is a 'disabled person' within s89(4) IHTA — i.e., either: (a) a person incapable by reason of mental disorder (Mental Health Act 1983 definition) of administering their property or managing their affairs; OR (b) a person in receipt of: Attendance Allowance; Disability Living Allowance (care component at the highest or middle rate); Personal Independence Payment (daily living component at the standard or enhanced rate); Armed Forces Independence Payment; Constant Attendance Allowance; or any prescribed disability benefit. NOTE: the disability must be established at the time the trust is established (or at the time property is added to the trust). If the disabled person later recovers and no longer meets the condition: the trust may cease to be a DPT. (2) THE HALF-BENEFIT CONDITION (s89(1)(b)): not less than HALF of the settled property applied during the disabled person's lifetime must be applied for the benefit of the disabled person. This is a MINIMUM 50% requirement — the disabled person must receive at least half of all distributions. The other half can go to other beneficiaries (family members, carers). (3) THE RESIDUAL CONDITION: no interest in the settled property can be applied for anyone other than the disabled person during their lifetime, EXCEPT to the extent needed to satisfy the half-benefit condition. The trust powers must be structured to allow distribution to the disabled person at least half the time. (4) TRUST DEED REQUIREMENTS: the trust deed must not give any other beneficiary (other than the disabled person) an interest greater than 50% of the total trust distributions during the disabled person's life. In practice: a careful trust deed will specify that the trustees must apply at least 50% of all capital and income applications to the disabled person. (5) MEETING THE CONDITIONS AT ALL TIMES: the trust must meet the conditions at all times — if it ceases to meet them (the disabled person recovers; the trust is restructured to benefit others more than 50%): it loses DPT status and becomes a relevant property trust (with retrospective charges if HMRC asserts). | PRACTICAL DRAFTING — THE HALF-BENEFIT CONDITION: the trust deed for a DPT for Daniel should state: 'The trustees shall apply the settled property so that not less than one half of all capital and income applied during the lifetime of Daniel [full name] is applied for the benefit of Daniel.' The trustees' powers to apply trust capital and income for other beneficiaries (Daniel's siblings; Daniel's carers) are SUBJECT TO this condition. HMRC GUIDANCE ON THE HALF-BENEFIT TEST: HMRC's position (IHTM16072): the half-benefit condition is assessed overall across the trust's life, not on each individual distribution. In practice: trustees should maintain records of all distributions and ensure the cumulative total applied to Daniel is at least 50%. BENEFIT THAT COUNTS FOR THE DISABLED PERSON: (a) direct payments to Daniel; (b) payments for Daniel's care, accommodation, clothing, medical costs, hobbies, education; (c) payments to Daniel's carers for services directly benefiting Daniel; (d) purchase of assets for Daniel's use. Does NOT count: distributions to siblings for their own benefit; trust management costs; investments within the trust (these are not 'applied' until distributed). DISABLED PERSON'S BENEFITS AND CAPITAL: a key planning issue — if the disabled person receives means-tested benefits (e.g., Universal Credit; Housing Benefit; legacy disability benefits), capital in the DPT counts as part of their means. Distributions from the DPT to the disabled person directly may affect their benefit entitlement. Specialist welfare benefits advice is essential alongside IHT planning for DPTs. | INTERACTION WITH MEANS-TESTED BENEFITS: the most important non-IHT issue with DPTs is the interaction with the disabled person's entitlement to means-tested benefits. KEY ISSUE: capital paid DIRECTLY to the disabled person counts as their capital for means-tested benefit purposes. If the DPT distributes £50k to Daniel (directly): Daniel's capital increases by £50k — this may take him above the capital limit for means-tested benefits (£16k for full benefits; £6k for partial benefits reduction). SOLUTION: instead of paying the disabled person directly, the trustees should pay for goods and services ON BEHALF OF the disabled person. Example: trustees pay Daniel's care home fees directly to the provider (not giving Daniel cash). Trustees buy Daniel's clothes, holidays, equipment directly. Daniel does not receive the cash — the trust pays his expenses for him. By keeping capital in the trust (not distributing it to Daniel), the DPT protects Daniel's means-tested benefit entitlement while still benefiting him. DISCRETIONARY TRUST AS ALTERNATIVE FOR MEANS-TESTED BENEFITS PROTECTION: if the primary concern is protecting means-tested benefits (rather than IHT efficiency), a fully discretionary trust may be more appropriate than a DPT (even though the DPT has better IHT treatment). A fully discretionary trust: the disabled person has NO entitlement and NO interest — the trust capital does NOT count as their capital for means-tested benefit purposes. But: the discretionary trust IS subject to periodic charges. THE CHOICE: if IHT is the primary concern and benefits protection is secondary (or the disabled person does not receive means-tested benefits): DPT is better. If benefits protection is the primary concern: discretionary trust may be better despite the periodic charges. SPECIALIST ADVICE: a dual strategy combining a DPT (for IHT efficiency) with careful distribution policy (trustees paying expenses, not distributing cash) can often achieve both objectives. |
| Vulnerable beneficiary tax relief (VBTR) and income tax/CGT within the DPT | VULNERABLE BENEFICIARY TAX RELIEF (VBTR — ss260-267 ITTOIA 2005; ss169-174 CTA 2010): a DPT is a 'qualifying trusts for a vulnerable beneficiary' (QTVB) under the Finance Act 2005 provisions. Where the DPT meets the conditions: the trustees can ELECT for VBTR. THE EFFECT OF VBTR ELECTION: income and capital gains within the DPT are taxed as if the disabled beneficiary (the vulnerable person) had received the income and gains directly. The trust is taxed at the disabled person's MARGINAL RATES (not the trust rates). WHY THIS IS BENEFICIAL: (a) INCOME TAX: the trust rate for discretionary trusts is 45% (2026-27). The disabled person's personal tax rate is typically lower (possibly 20% or even 0% if their income is below the personal allowance). VBTR: the trust's income is taxed at the disabled person's rates — potentially saving 25% income tax (45% trust rate vs 20% personal rate). (b) CGT: the trust CGT rate for trustees is 20% (or 28% for residential property). The disabled person may have a lower rate (10% or 18% if basic-rate taxpayer) or an unused annual CGT exempt amount. VBTR: the CGT is calculated at the disabled person's rates and using their annual exempt amount — potentially a significant saving. HOW TO ELECT FOR VBTR: the trustees must make a joint election with the disabled beneficiary (or their guardian/deputy on their behalf). The election is made to HMRC on form VB1 (Vulnerable Beneficiary Tax Relief election). Once elected, the trust reports income and gains as if they were the vulnerable beneficiary's — using the Trust and Estate Tax Return (SA900) with supplementary VBTR calculations. | VBTR TAX SAVING EXAMPLE: a DPT holds £500k invested in UK equities (dividend yield: 4% = £20k/yr; CGT realised: £15k/yr). TRUST INCOME TAX WITHOUT VBTR: £20k dividends taxed at trust rate 39.35% = £7,870 tax. TRUST CGT WITHOUT VBTR: £15k gain taxed at 20% = £3,000 tax. Total without VBTR: £10,870/yr. WITH VBTR: the disabled beneficiary Daniel has only his state benefits as income (below the personal allowance: £12,570). Dividend income: £20k — Daniel has personal allowance remaining (say £12,570 − £0 benefits = £12,570 allowance). Net dividend over personal allowance = £7,430. At 8.75% basic-rate dividend tax: £651 income tax. CGT: Daniel's annual exempt amount (£3,000 in 2026-27). £15k gain − £3k exempt = £12k. At 10% basic-rate: £1,200 CGT. Total with VBTR: £651 + £1,200 = £1,851/yr. ANNUAL SAVING WITH VBTR vs WITHOUT VBTR: £10,870 − £1,851 = £9,019/yr. Over 20yr trust life: approximately £180k in tax saved. VBTR is extremely valuable for DPTs with significant investments. The annual VBTR calculation must be reported on the trust's SA900 return (with the VBTR supplement) and also on the disabled beneficiary's SA100 return. | SETTING UP A DPT — PRACTICAL STEPS: (1) ESTABLISH THE DISABLED PERSON'S QUALIFYING STATUS: obtain evidence of the disability condition — either: (a) medical evidence of mental disorder (letter from the treating psychiatrist/GP confirming mental disorder within the MHA 1983 and inability to manage affairs); OR (b) evidence of qualifying disability benefit receipt (copy of DLA/PIP award letter; Attendance Allowance decision letter). File this evidence with the trust documents. (2) TRUST DEED DRAFTING: use a specialist trust solicitor experienced in disabled person's trusts. The trust deed must: (a) meet the s89 IHTA conditions exactly (half-benefit; no greater than 50% to others during the disabled person's life); (b) give the trustees appropriate investment and distribution powers; (c) include a 'fall-back' provision if the disabled person dies (the trust converts to an ordinary discretionary trust for other beneficiaries or terminates). (3) IHT REPORTING: if established during the settlor's lifetime: the settlement is a CLT — report on IHT100 if above NRB. If established by will: the trust qualifies as a DPT from the testator's death — no CLT. (4) VBTR ELECTION: file form VB1 jointly with the disabled person (or their deputy) as soon as possible after the trust is established. The election cannot be made retrospectively for earlier tax years (it is prospective). (5) ONGOING ADMINISTRATION: maintain records of all distributions (to confirm the half-benefit condition is met); file annual SA900 trust returns with VBTR supplement; coordinate with the disabled beneficiary's welfare benefits adviser to manage capital distributions carefully. |
| Creating a DPT by will — planning for a disabled child | WILL PLANNING FOR A DISABLED CHILD: the most common route for a DPT is creation by will. A parent who has a disabled adult child (or anticipates a child becoming disabled) should consider creating a DPT by will for the disabled child's benefit. OPTIONS IN THE WILL: (a) DIRECT DPT CREATION: the will directly creates an s89 IHTA DPT for the disabled child. The relevant share of the estate is settled on the DPT on the testator's death. No periodic/exit charges from the start. Cleaner structure — the DPT is established from the date of death. (b) DISCRETIONARY TRUST WITH s144 CONVERSION: the will creates an initial discretionary trust for all children (including the disabled child). Within 2yr of death (s144 IHTA reading-back): the trustees appoint the disabled child's share to an s89 IHTA DPT. Reading-back: the DPT is treated as if created by the will. This gives flexibility — if the disabled child's circumstances change within the 2yr window (e.g., their disability is different from expected), the trustees can choose whether to convert to a DPT. THE RNRB WITH A DPT: a DPT for a disabled direct descendant (child/grandchild) is a qualifying trust for the RNRB (s8H IHTA — 'disabled person's trust within s89 IHTA' is a qualifying trust for RNRB purposes). Where the family home passes via the will into a DPT for the disabled child: the RNRB applies (up to £175k per parent; £350k per couple in 2026-27). This is a significant difference from an ordinary discretionary trust (which does NOT qualify for the RNRB). LETTER OF WISHES: accompany the will with a detailed letter of wishes explaining: the nature of the disability; the preferred distribution policy (pay for expenses directly; do not distribute cash; coordinate with benefits); the priority that the trust should benefit the disabled child for their lifetime; what should happen to the trust on the disabled child's death. | WILL PLANNING FOR A DISABLED CHILD — WORKED EXAMPLE: Robert and Mary (married). Their son Tom (aged 35) has severe learning disabilities — receives Personal Independence Payment (daily living component enhanced rate). Robert and Mary each have estates of £750k (£1.5m combined). EXISTING WILL PLANNING: Robert's will: all to Mary (spouse exempt). Mary's will: half to Tom; half to their daughter Lucy. TAX POSITION ON MARY'S DEATH: £1.5m estate (inheriting Robert's full estate + TNRB of £325k = total NRB £650k + RNRB £350k = £1m threshold). IHT: 40% × (£1.5m − £1m) = 40% × £500k = £200k IHT. Tom's inheritance (£750k share after IHT): goes via Mary's will. IF MARY'S WILL LEAVES TOM'S SHARE TO AN ORDINARY DISCRETIONARY TRUST: £750k in trust. 10yr periodic charges: 6% × (£750k − £325k) = 6% × £425k = £25,500 every 10yr. RNRB: the trust does not qualify (ordinary discretionary trust is not a qualifying beneficiary for RNRB). RNRB lost on Tom's share = £175k RNRB not claimed → IHT cost of £70k. TOTAL IHT + PERIODIC CHARGES: significantly higher. IF MARY'S WILL LEAVES TOM'S SHARE TO A DISABLED PERSON'S TRUST (s89 IHTA): NO periodic charges. RNRB: the DPT for Tom qualifies (s89 IHTA DPT = qualifying trust for RNRB). RNRB claimed on the home passing to the DPT. IHT saving + periodic charges saving: significant compared to the ordinary discretionary trust option. | INTERACTION WITH MENTAL CAPACITY: where the disabled child lacks mental capacity (by reason of mental disorder), a Court of Protection Deputy (appointed under the Mental Capacity Act 2005) may act on their behalf in relation to trust decisions. The Deputy can: (a) consent to VBTR elections on behalf of the disabled beneficiary; (b) give trustees guidance on the disabled beneficiary's needs; (c) apply to the Court of Protection to vary the trust if circumstances change (Variation of Trusts Act 1958; or statutory power under MCA 2005). THE COURT OF PROTECTION AND TRUSTS: where a disabled person's trust has significant assets and the beneficiary lacks capacity: the trustees (in England and Wales) can seek guidance from the Court of Protection on trust management issues. The Court can appoint a professional trustee to act alongside family members. CONFLICTS OF INTEREST: a parent who is both a trustee of the DPT and a remainderman (inheriting the trust on the disabled child's death) has a potential conflict of interest. Consider appointing an independent professional trustee alongside the family trustees. SPECIALIST ADVICE: creating a DPT requires coordinated advice from: (a) a specialist trust solicitor (for the trust deed and will drafting); (b) an IHT accountant (for VBTR elections; trust administration); (c) a welfare benefits adviser (for benefits impact analysis); (d) possibly a Court of Protection specialist (if the disabled person lacks capacity). The cost of proper professional advice is small compared to the IHT and benefits savings achievable over decades. |
Disabled person's trust and IHT UK 2026. s89 IHTA 1984 (as amended by Finance Act 2006 and Finance Act 2014): 'For the purposes of this Act a settlement is a settlement for the benefit of a disabled person if — (a) the settled property is held on trust for the benefit of a person who is disabled, and (b) either the trust provides that not less than half of the settled property applied during the disabled person's lifetime is applied for the benefit of the disabled person, or the disabled person is entitled to all of the income (if any) arising from the settled property.' s89(4) IHTA: 'disabled person' means a person who by reason of mental disorder within the meaning of the Mental Health Act 1983 is incapable of administering their property or managing their affairs, or is in receipt of attendance allowance, Disability Living Allowance (care component — highest or middle rate), Personal Independence Payment (daily living component — standard or enhanced rate), Armed Forces Independence Payment, or Constant Attendance Allowance. s89(1) IHTA: 'For the purposes of this Act, where settled property is held on trusts which — (a) secure that, during the life of a disabled person, not less than half of the property which is applied is applied for the benefit of that person, and (b) do not permit application of any of the settled property during the life of that person for any purpose other than (i) the benefit of the disabled person, or (ii) meeting the costs of the trust, the settlement shall be treated as if the disabled person were beneficially entitled to an interest in possession in the settled property.' CONSEQUENCE OF IIP TREATMENT: s49(1) IHTA 1984 — a person beneficially entitled to an interest in possession in settled property is treated as beneficially entitled to the property in which the interest subsists. Therefore: the trust property is treated as part of the disabled person's estate for IHT. On death: included in the disabled person's estate and taxed at death rates (40% above the thresholds applicable to the disabled person's estate — including their NRB, RNRB, and any TNRB from a predeceasing spouse). NO PERIODIC CHARGES: because the property is treated as owned by the disabled person (IIP treatment — s49(1)), it is NOT relevant property (ss58-69 IHTA). Relevant property regime does NOT apply. s65 IHTA (exit charges) and s64 IHTA (10-year charges) do NOT apply. RNRB QUALIFICATION: Finance Act 2006 inserted into s8H IHTA (as part of the RNRB legislation): a trust for a disabled person (s89 IHTA) is a qualifying trust for the purposes of the RNRB where the qualifying residential interest passes into the trust and the disabled person is a direct descendant of the deceased. The home is treated as closely inherited by the disabled person. s89B IHTA 1984 (self-settled DPT): 'Where a disabled person — (a) has settled property on trusts which secure that not less than half of the property which is applied during the disabled person's lifetime is applied for the benefit of that person, and (b) is beneficially entitled to an interest in possession in all of the settled property on the settlement being made, the settlement shall not be treated as a chargeable transfer by the disabled person.' A disabled person can self-settle a DPT without triggering a CLT — the settlement is an IIP settlement (treated as the disabled person retaining beneficial entitlement). Vulnerable Beneficiary Tax Relief (VBTR — Finance Act 2005): ss23-45 Finance Act 2005 (now ss260-267 ITTOIA 2005 and ss169-174 CTA 2010). A qualifying trust for a vulnerable beneficiary (QTVB) includes an s89 IHTA disabled person's trust. On election by trustees and the vulnerable person (form VB1): the trust is assessed to tax at the vulnerable person's rates rather than the trust rates. The calculation: (a) calculate the trust's actual tax liability (at trust rates — 45% income; 39.35% dividends; 20% CGT); (b) calculate the 'amount of tax benefit' — the tax the vulnerable person would have paid if the income and gains were assessed on them directly; (c) the trust pays the lower of the two amounts. The election must be renewed annually (not indefinitely automatic) — file VB1 each year or confirm continuation with HMRC. HMRC guidance: Trusts, Settlements and Estates Manual TSEM10000-TSEM10900 (disabled person's trusts); TSEM10100 (definition of disabled person); TSEM10200 (half-benefit condition); TSEM10300 (self-settled trusts — s89B); TSEM10400 (VBTR). Welfare benefits interaction: DLA and PIP have capital rules separate from Universal Credit. For Universal Credit: capital (including trust capital where the person has an IIP) is counted toward the £16k capital limit (above which UC is nil). DLA/PIP are not means-tested — not affected by the trust capital. A fully discretionary trust (not DPT) does not count as the disabled person's capital for UC (because they have no legal entitlement — it is the trustees' discretion). However, an s89 DPT (IIP treatment) may count as their capital under UC rules — seek specialist welfare benefits advice.
Frequently Asked Questions
What is a disabled person's trust for IHT and how is it taxed?
A disabled person's trust (DPT) under s89 IHTA 1984 is a trust established for a person with a qualifying disability (mental disorder preventing management of their affairs, or receipt of Attendance Allowance, PIP daily living component, DLA care component, or similar benefit). A qualifying DPT is NOT a relevant property trust — it does not suffer 10-year periodic charges (up to 6% of trust value above the NRB every 10 years) or exit charges when property leaves the trust. Instead, the trust property is treated as if the disabled person has an immediate interest in possession — included in their estate for IHT on death. This avoids ongoing periodic and exit charges that would apply to an ordinary discretionary trust. The trust must apply at least 50% of distributed property for the disabled person's benefit during their lifetime (the 'half-benefit condition').
Who qualifies as a disabled person for an s89 IHTA trust?
Under s89(4) IHTA 1984, a 'disabled person' is either: (a) a person incapable by reason of mental disorder (within the Mental Health Act 1983) of administering their property or managing their affairs; OR (b) a person in receipt of: Disability Living Allowance (care component — highest or middle rate); Personal Independence Payment (daily living component — standard or enhanced rate); Attendance Allowance; Armed Forces Independence Payment; Constant Attendance Allowance; or any other prescribed disability benefit. The qualifying disability must be established at the time the trust is created (or when property is added). A person with autism, learning disabilities, severe physical disabilities, dementia, or serious mental illness typically qualifies — but the specific benefit receipt or incapacity test must be met. Medical evidence and/or benefit award letters should be kept with the trust documents.
What is Vulnerable Beneficiary Tax Relief and how does it help?
Vulnerable Beneficiary Tax Relief (VBTR) under ss260-267 ITTOIA 2005 allows the trustees of a disabled person's trust to elect for the trust's income and capital gains to be taxed at the disabled person's personal tax rates — not the 45% trust rate. This can produce substantial tax savings where the disabled beneficiary has a low income (perhaps only disability benefits below the personal allowance of £12,570). Income that would be taxed at 45% in an ordinary trust is taxed at 0-20% using the beneficiary's personal allowance and basic-rate band. CGT that would be taxed at 20% in an ordinary trust uses the beneficiary's lower rate and annual exempt amount. The election is made jointly by the trustees and the disabled beneficiary (or their Court of Protection deputy/guardian) using HMRC form VB1. The election is prospective — it cannot be backdated. Once elected, the trust files its SA900 return with a VBTR supplement to calculate the trust's adjusted tax liability.
Can I leave money to my disabled child via a disabled person's trust in my will?
Yes — a will can directly create an s89 IHTA disabled person's trust for a disabled child. The testator's will leaves the disabled child's share of the estate to trustees on trust under the DPT terms. The DPT is established from the date of death. IHT benefits: no periodic charges or exit charges during the trust's life. The family home passing via the DPT qualifies for the Residence Nil-Rate Band (RNRB) — a DPT for a disabled direct descendant is a qualifying trust for RNRB purposes. An ordinary discretionary trust does NOT qualify for the RNRB. The will can also use an initial discretionary trust with a s144 IHTA appointment within 2 years to convert to a DPT (giving trustees flexibility to see the full picture before deciding the trust structure). Specialist will drafting and welfare benefits advice are essential — the DPT's capital may affect means-tested benefit entitlement if cash is distributed directly to the disabled person.
Does a disabled person's trust affect means-tested benefits?
It can — capital held in an s89 IHTA disabled person's trust counts toward the disabled beneficiary's capital for means-tested benefit purposes (because the DPT is treated as an interest in possession trust, and trust capital in which a person has an IIP is generally treated as their capital for benefit means-testing). This is in contrast to an ordinary discretionary trust (where the disabled person has no interest — the capital is not counted as theirs for means-testing). The DPT's IHT advantage comes with a means-tested benefits risk. Mitigation: trustees should avoid distributing cash directly to the disabled person; instead, pay for goods and services directly (care costs, accommodation, equipment, activities). Direct payments from the trust for the disabled person's benefit that never pass through their hands do not count as their capital. Specialist welfare benefits advice is essential when creating a DPT to design a distribution policy that protects both IHT efficiency and benefits entitlement.
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