Some trusts for disabled people or children receive special tax treatment. These are called ‘a vulnerable person’s trust’.
Who qualifies as a vulnerable beneficiary in these trusts?
A vulnerable beneficiary is one whom is under the age of 18 whose parent has died or a disabled person who is eligible for any of the following benefits (even if they do not received them):
- Attendance Allowance (either the care component at the middle or highest rate, or the mobility component at the highest rate)
- Personal Independence Allowance
- An increased disablement pension
- Constant Attendance Allowance
- Armed Forces Independence Payment
A vulnerable beneficiary can also be someone who is unable to manage their own affairs because of a mental health condition – check with a medical professional that it is covered by the Mental Health Act 1973.
What if there is more than one beneficiary?
If there are beneficiaries who aren’t vulnerable, the assets and income for the vulnerable beneficiary must be:
- Identified and kept separate
- Used only for that person
Only that part of the trust gets the special tax treatment.
Claiming special tax treatment
To claim special treatment for Income Tax and Capital Gains Tax, the trustees have to submit the Vulnerable Person Election Form https://www.gov.uk/government/publications/trusts-andestates-vulnerable-person-election-form-vpe1
If there’s more than one vulnerable beneficiary, each needs a separate form.
Information extracted from https://www.gov.uk/trusts-taxes/trusts-for-vulnerable-people
In a trust with a vulnerable beneficiary, the trustees are entitled to a deduction of Income Tax. It’s calculated like this:-
1. Trustees work out what their trust Income Tax would be if there was no claim for special treatment
2. They then work out what Income Tax the vulnerable person would have paid if the trust income had been paid directly to them as an individual
3. They can then claim the difference between these 2 figures as a deduction from their won Income Tax liability
Capital Gains Tax
Capital Gains Tax may be due if the assets are sold, given away, exchanged or transferred in another way and they have gone up in value since being transferred into trust.
Tax is only paid by trustees if the assets have increased in value above the ‘annual exempt amount, which is an allowance of £11,700 for people who have a mental or physical disability, or £5,850 for other trustees.
Trustees are responsible for paying any Capital Gains Tax due. If the trust is for Vulnerable people, trustees can claim a reduction, which is calculated like this:
1. They work out what they would pay if there was no reduction.
2. They then work out what the beneficiary would have to pay if the gains had come directly to them.
3. They can claim the difference between these two amounts as a reduction on what they have to pay in Capital Gains Tax using form SA905 https://www.gov.uk/government/publications/self-assessment-trust-and-estatecapital-gains-sa905
This special Capital Gains Tax Treatment does not apply in the tax year when the beneficiary dies.
For more information on the matter contact the SWW Trust Corporation on 01522 581 570 for a confidential chat