Receiving an inheritance can be a disappointment for a disabled person. Money from an inheritance or a gift will normally be counted as an asset for means-tested benefits or services.
For a disabled person, who receives benefits and services, this can mean that a once in a life time opportunity to lead a fuller or more comfortable life makes little difference. The money simply replaces state funding benefits and services until it runs out, when they go back on to means tested benefits.
A Vulnerable Beneficiary Trust or Disabled Person’s Trust can be a way of ring-fencing the windfall so that means tested benefits are not affected.
Not only can such trusts avoid means testing, but they also avoid the harsh tax regime that now applies to UK trusts. This includes Inheritance Tax, which confusingly applies to assets put into trust for the benefit of the living. Inheritance Tax can result in substantial tax liabilities becoming due on payments in and out of the trust and periodical charges. In short, where it does apply, it can be very expensive.
The position in relation to Capital Gains Tax (CGT) is equally complex. In the past CGT due on the death of the beneficiary was a disincentive to the use of these trusts. However, recently that position has improved.
The Finance Act 2014 is to extend sections 72 and 73 of the Taxation of Chargeable Gains Act to include disabled beneficiaries where the beneficiary has no entitlement to the income of the trust. This extension of the CGT “uplift” provisions is long awaited and provides a level playing field in terms of CGT liabilities on the death between these disabled beneficiaries and others.
Setting up such trusts should be done before the person receives the money, otherwise there may be problems with the Department of Work and Pensions (DWP) deprivation of capital rules. The money should be given to the trust not the person. Although it is possible to overcome this problem, where the money derives from a legacy, it is an expensive process. If a qualifying disabled person is to receive an inheritance or award or gift, we would recommend that they take specialist legal advice, before doing so.
In the past the benefits of these Vulnerable Beneficiary Trusts are only available for a few disabled people. They included those claiming Attendance Allowance or receiving middle or higher rate care component of Disability Living Allowance (DLA). However that may change.
Changes to the benefits regime, whereby DLA is being replaced by Personal Independence Payments (PIP) are underway. Whilst this is widely thought that when these changes eventually take effect, less people will qualify for DLA, all those receiving PIP’s will qualify for these trusts.
This is as a result of the Finance Act 2013 extending those able to apply to include those receiving the daily living component of PIP (at either rate). The Finance Act 2014 is to include that further to include all those in receipt of PIP by virtue of entitlement to the mobility component (at either rate).
In short, all PIP claimants will be qualifying beneficiaries. This may result in more people becoming eligible.
It should be noted that there are other complex qualification rules as to the nature of the trust and how income an capital are dealt with, on which specific advice should be sought. The benefits of Vulnerable Beneficiary Trusts are essentially aimed at trusts other than bare trusts. However, Chapter 4 of Part 2 to Finance Act 2005 (as amended) sets out qualification rules for income and capital gains tax purposes. The position regarding Inheritance Tax is complex but the best place to start is s.89 and 89B of the Inheritance Tax Act 1984 (as amended). Trust deeds need to be carefully drawn up to ensure qualification, or substantial liabilities will result.
This is a complicated area of the law but recent changes do open up new possibilities for people with disabilities who receive unexpected funds to really benefit from them.