Trust for a Disabled Person UK: IHT Benefits and How to Set One Up

Updated: 16 May 2026 • Reading time: 8 min

Parents and grandparents of disabled children often face a difficult planning question: how to leave assets that will support a disabled beneficiary without disrupting their means-tested benefits, and without the high tax costs of an ordinary discretionary trust. A disabled person’s trust under section 89 of the Inheritance Tax Act 1984 provides a specialist solution — combining asset protection with significant IHT and CGT advantages.

Why Not Just Leave Assets Outright?

Leaving a large sum directly to a disabled person can cause two problems. First, if the disabled person receives means-tested benefits (such as Universal Credit, Housing Benefit, or social care funding), receiving capital or income above the threshold can reduce or eliminate those benefits — potentially making them worse off overall. Second, a vulnerable person may not be well-placed to manage a substantial sum of money without support.

A trust allows assets to be held and managed by trustees for the disabled person’s benefit, giving them flexible access to funds while potentially preserving their eligibility for means-tested benefits — depending on how the trust is structured and how HMRC and the benefits authorities treat it.

Who Qualifies as a Disabled Person?

For IHT purposes, the beneficiary must be “disabled” within the meaning of the Finance Act 2005 Schedule 1A (as applied by section 89 IHTA 1984 as amended by Finance Act 2013). The definition covers:

• Persons who cannot administer their property or manage their affairs by reason of mental disorder within the meaning of the Mental Health Act 1983
• Persons in receipt of Attendance Allowance
• Persons in receipt of the highest or middle rate care component of Disability Living Allowance (DLA)
• Persons in receipt of the daily living component of Personal Independence Payment (PIP) at either rate
• Persons in receipt of Armed Forces Independence Payment

The disability must exist at the time the trust is created — for a testamentary trust, this is when probate is granted and the trust comes into existence.

IHT Treatment: No Periodic or Exit Charges

Under section 89 IHTA 1984, a qualifying disabled person’s trust is treated for IHT purposes as if the disabled beneficiary had an interest in possession— not as a discretionary trust subject to the relevant property regime. The consequences:

• No 10-year periodic charges — ordinary discretionary trusts pay up to 6% of the trust fund every ten years; a s.89 trust pays nothing
• No exit charges — distributions from a discretionary trust to beneficiaries attract an IHT exit charge; a s.89 trust does not
• CGT uplift on death — because the trust assets are treated as belonging to the disabled beneficiary, they receive a CGT uplift to market value on the disabled beneficiary’s death, eliminating accrued gains
• Transfer into the trust — assets transferred into the trust on death (under a will) do not trigger an IHT entry charge, subject to the nil-rate band rules

The Vulnerable Beneficiary Regime: Income Tax and CGT

Separately from the IHT treatment, trustees can elect into the vulnerable beneficiary regime under the Taxation of Chargeable Gains Act 1992 (ss.169H–169S) and the Income Tax Act 2007 (ss.30–43). This election means:

• Income and gains arising in the trust are taxed at the disabled beneficiary’s personal rates — not at the trust’s higher rates (45% income tax, 28% CGT for residential property)
• The disabled beneficiary’s personal allowances, basic rate band, CGT annual exempt amount, and other reliefs apply to the trust’s income and gains
• The election must be made annually on the trust’s tax return

For a trust with a meaningful investment portfolio, this regime can save substantial tax every year.

Conditions the Trust Must Meet

To qualify under section 89 (as amended by Finance Act 2013), the trust must satisfy one of these income conditions:

1. The disabled beneficiary is entitled to not less than half of the trust income arising; or
2. No trust income is paid to anyone other than the disabled beneficiary

The Finance Act 2013 introduced a “de minimis” exception: a trust can pay up to £3,000 per year (or 3% of the trust fund value if greater) to persons other than the disabled beneficiary without losing qualifying status. This allows for a degree of flexibility — for example, paying administrative expenses or making small gifts to other family members.

Means-Tested Benefits Considerations

The interaction between disabled person’s trusts and means-tested benefits is complex and must be considered case by case. The DWP’s treatment depends on whether the disabled beneficiary is treated as having a right to benefit from the trust or merely a discretionary interest. In general:

• A fully discretionary trust where the disabled person has no entitlement to income or capital may not count as a capital asset for means testing
• A trust where the disabled person has a right to income is more likely to be treated as an asset
• Specialist advice from a welfare benefits lawyer is essential alongside the trust drafting

Including a Disabled Person’s Trust in Your Will

A testamentary disabled person’s trust is created when the will-maker dies and probate is granted. To ensure it qualifies under section 89:

• The beneficiary must meet the disability definition at the time of trust creation
• The trust terms must satisfy the income conditions
• The trustees should be given appropriate powers to administer the trust for the disabled beneficiary’s long-term welfare
• Professional legal drafting is essential — an incorrectly drafted trust will not qualify

Frequently Asked Questions