A vulnerable person’s trust is a broad description applied to a trust created for a beneficiary who requires financial support and assistance in managing their affairs because of a lack of capacity. There are a number of income tax, capital gains tax, and inheritance tax provisions which might apply to a vulnerable person’s trust. There is no single set of rules but there are uniform qualifying conditions for all of these separate provisions. A vulnerable beneficiary is either:
- A young person who has not yet attained the age of 18 and at least one of the parents has died, or a disabled person.
- A ‘disabled person’ is someone who qualifies for certain welfare benefits because of a disability, or someone who is unable to manage their affairs because of a mental disorder within the meaning of the Mental Health Act 1983. Significantly, the term ‘vulnerable beneficiary’ does not cover a person incapable of managing their affairs because of an addiction or undue influence.
- The trust must include terms that restrict the application of virtually all of the trust property to the benefit of the specified vulnerable beneficiary.
The aim of the special tax provisions is broadly to remove a tax disadvantage which arises because the property is held in trust instead of personally by the beneficiary. So, for inheritance tax, a trust for a disabled person or a bereaved minor does not suffer tax charges during the life of the trust. For capital gains tax, there are exceptions for vulnerable beneficiary trusts relating to: the annual exemption; rate of tax; tax free uplift on death; hold-over relief; private residence relief. For income tax, there is an option to tax the trust directly as if it were the personal income of the beneficiary.