Disabled Persons Trust

Trusts Discussion
1

I am dealing with some IHT planning for a spouse who inherited the estate from her husband recently.

Estate is over £2m so I have recommended settling a trust for their daughter by way of a DOV from H’s Will, as the property held by the wife is hugely pregnant with CGT.

The daughter is disabled by virtue of the definition by being in receipt of PIP. The trouble is, the daughter has told me she could later lose her receipt of PIP, and lose her “disabled” status.

For this reason, I am considering a DPT by way of DOV in H’s Will as we know she currently is deemed disabled, and a Disc Trust in mother’s Will with powers to advance in the event daughter is still disabled at mother’s death.

I am struggling to find either on Lexis or Practical Law any information that confirms what happens in the event the daughter loses her disabled status after the DPT is set up from her late father’s Will.

I saw literature on Practical law which states that if the disabled person’s interest ends in their lifetime, and the assets do not leave the trust, then it is a chargeable transfer at lifetime rate and assets become relevant property. So essentially, a 20% lifetime tax on anything over £325k. This seems obscure to me, hence me posting on here. Further, if this is so, is this lifetime tax calculated in respect of the daughters NRB? Presumably it must be. This all seems obscure to me, given the trust is discretionary in nature…

Practical law also states that if the trust is a QIIP, then if the daughter gives up her right to the trust (or presumably loses it because she is no longer disabled) then this is a PET. However, we would draft the trust on the basis that if the disabled status were lost, the daughter would take the property absolutely, in which case can you have a PET against yourself? Again, this seems

I’d be grateful if someone could point me in the way of some literature which goes into detail on this isn’t adding up at all. I can’t seem to find anything which clearly confirms what occurs if the disabled party loses their disabled status in their lifetime. As well as what happens if they died. It seems if they died then the trust is aggregated with their estate, but it is not clear if this is for all forms of DPT, or just for QIIP ones, as opposed to discretionary ones.

I’d be grateful for some direction.

2

For inheritance tax purposes, the qualification criteria for a disabled person’s interest have to be satisfied at the date the trust is set up or at the date funds are added to it. HMRC has confirmed this in its Inheritance Tax Manual at IHTM2805 which says:

“This special treatment of trusts can apply even if the disability ceases, for instance because the patient is restored to mental health or no longer receives an attendance allowance. It is sufficient that the person was within the conditions for ‘disabled’ treatment when the property was transferred into settlement. IHTA84/S89(4).”

The assets in the trust should, therefore, still be regarded as non-relevant property even if the beneficiary is no longer regarded as a disabled person for tax purposes. This means that ten year anniversary and exit charges will not be incurred.

However, for capital gains tax and income tax purposes, the eligibility criteria are looked at tax year to tax year.

If the capital of the trust is appointed out to the disabled person absolutely during their lifetime at the point that they no longer qualify as disabled (so that the trust comes to an end), as mentioned above the trust will still qualify as a QIIP, the Practical Law resource you have referred to explains that there will be no transfer of value for inheritance tax purposes because the disabled person would already be treated as beneficially entitled to the assets in the trust. There will, however, be a disposal for capital gains tax purposes.

On the death of the disabled person, the assets in the disabled person’s trust will be treated as part of the disabled person’s estate so that a proportion of the charge arising on death will be payable by the trustees of the disabled trust