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Tax & Estate Planning & UK trusts, tax and estate planning

Gifts to Disabled and Vulnerable People

When making a gift to a disabled or vulnerable person, it is not only important to consider the donor’s position but also that of the recipient of the gift.

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When making a gift to a disabled or vulnerable person, it is not only important to consider the donor’s position but also that of the recipient of the gift. For example, an ill-considered outright gift to a disabled or vulnerable person may do more harm than good for their own physical or mental wellbeing and in terms of affecting their entitlement to state benefits. You will also need to consider whether the recipient of the gift has sufficient capacity to give good receipt.

Rather than making a gift to the person directly, a trust can be a useful mechanism for avoiding some of the issues above. Generally, there are three trust options that may be available: a disabled person’s trust, a discretionary trust and a protective trust.
Where the beneficiary is disabled, a disabled person’s trust is an option. Firstly, it is imperative to consider if the individual qualifies as ‘disabled’ for the purposes of the Inheritance Tax Act 1984.

A disabled person’s trust can come in the form of a life interest trust (i.e. an interest to the income and a right to enjoy the trust assets, whilst the capital is controlled by the trustees), or more commonly in the form of a discretionary trust. The discretionary trust allows the trustees to advance income and capital to the beneficiaries as they see fit. Crucially, however, a disabled person’s trust can benefit from very favourable tax treatment and they can allow for the protection of the individual’s entitlement to state benefits.

If the individual does not qualify as a disabled person for tax purposes (e.g. where the individual has addiction issues or is not sufficiently mature to receive funds outright), then a traditional discretionary trust may be a flexible option. As mentioned above, a discretionary trust allows the trustees to make decisions to meet the changing needs of the disabled or vulnerable person during their lifetime.

The final trust for consideration is a protective trust where the beneficiary initially receives a life interest (see above). It is ‘protective’ as the life interest automatically comes to an end if, for example, the beneficiary is declared bankrupt. On termination of the life interest, the trust fund can then be held on discretionary trust for a wider class of beneficiaries which can include the disabled or vulnerable beneficiary but can also include others.

 

Read the latest in our lifetime giving series: Can I gift my holiday home or rental property to my children?

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