The following Trusts and Inheritance Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:
A disabled person’s interest is a disabled person’s entitlement to property held in trust. The entitlement could be discretionary or fixed. It is usually created by another person for his benefit but could also be created by himself.
A trust for a disabled person receives special inheritance tax (IHT) treatment whether created during a lifetime or following a death.
The definition of a ‘disabled person’ includes someone who:
cannot manage his own affairs because of mental disorder
is receiving certain welfare benefits indicating a physical or mental disability
For the full definition, see the Disabled and vulnerable beneficiary trusts ― uniform definitions guidance note.
A disabled person’s interest (DPI) is a qualifying interest in possession (QIIP). See the Qualifying interest in possession guidance note.
For IHT purposes, this means that he is treated as if he owns the underlying trust property, with the following consequences:
a person who transfers property during his lifetime to a trust for a disabled person makes a potentially exempt transfer (PET) (see the Potentially exempt transfers guidance note). Apart from a bare trust, this is the only example of a lifetime trust created after 22 March 2006 that is not a relevant property trust
the settlor of a self-settlement (see below) does not make a PET; he makes no transfer of value at all because the property is not leaving his estate for IHT purposes
there are no IHT consequences on any payment of capital by the trustees to the disabled person during his lifetime
a payment of capital to other beneficiaries, which may be permitted under the terms of the trust, is a termination of the disabled person’s interest in possession and is a PET. It will become chargeable if the disabled beneficiary dies within seven years
on the death of the disabled beneficiary, the value of his interest in the trust will be aggregated with his free estate, subject
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