Pre 2013 disabled person's trust and vulnerable beneficiary election

Trusts Discussion
1

We have a trust for a vulnerable person which was set up in 2003 to qualify for special IHT treatment under s89 IHTA1984. It does not qualify for special CGT treatment, and is settlor interested.

As was permitted under s89 at the time, the trust is wholly discretionary as to income, even during the lifetime of the vulnerable beneficiary. This would not be permitted under s89 now, but under FA2013 the trust still qualifies for beneficial IHT treatment under s89, provided it is not altered. The problem is that the trust as it is does not qualify for a vulnerable beneficiary election, and this means that CGT will become an increasing problem following the reduction in the annual CGT exemption.

I wondered whether we might change the trust to restrict the trustees’ powers to apply income, so that it would qualify under the current s89 IHTA, which applies to settled property transferred into a settlement after 9th March 1981. We would then lose the benefit of the grandfathering provisions in FA2013, but it seems to me that the trust will still qualify under s89 IHTA. Do others agree?

A further complication in this particular trust is that the accumulation period will come to an end next year, so it occurs to me that if we alter the trust so that income can only be applied for the benefit of the vulnerable beneficiary (so that it qualifies under the current s89 IHTA), once the accumulation period has ended it will in effect be an interest in possession trust anyway, and will once again no longer qualify. Is that correct?

Diana Smart
Gordons LLP

2

As a follow-up to my earlier post on this topic, and in the hope that someone more familiar with disabled persons trusts than I am will be able to comment, I have been giving the matter some further thought.

It seems to me that the simplest option here is to appoint an actual interest in possession to the disabled beneficiary on terms which will either also give the trustees a full annual exemption automatically, or which will allow them to make a vulnerable beneficiary election. My analysis includes the following:

  • The disabled beneficiary is already treated as having a QIIP under s89 IHTA 1984;
  • If he becomes entitled to an actual IIP now, by appointment, that will also qualify as a QIIP under s89B IHTA 1984;
  • Therefore no chargeable transfer arises.

We would clearly also have to be careful to avoid any suggestion that this is a new trust, to avoid a CGT disposal.

Can anyone confirm whether the above analysis is correct? I am really struggling to find any commentary on the issue.