Vulnerable beneficiary trusts

Produced by Tolley

The following Trusts and Inheritance Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Vulnerable beneficiary trusts
  • What is a vulnerable beneficiary trust?
  • Aim and effect of the relief
  • Qualifying conditions for a vulnerable beneficiary trust
  • Vulnerable beneficiary election and claiming relief
  • Procedure for making the election
  • Procedure for making a claim

Vulnerable beneficiary trusts

What is a vulnerable beneficiary trust?

The category of ‘Trusts with vulnerable beneficiary’ was created by Finance Act 2005 to introduce special income tax and capital gains tax reliefs where property is held on trust for the benefit of a ‘vulnerable person’.

A vulnerable person is either:

  1. a disabled person (as defined below)

  2. a ‘relevant minor’, defined as a young person who has not yet attained the age of 18, and at least one of his parents has died

The definition of a ‘disabled person’ includes someone who:

  1. cannot manage his own affairs because of mental disorder

  2. is entitled to receive certain welfare benefits indicating a physical or mental disability

FA 2005, s 38

For the full definition and a list of the qualifying welfare benefits, see the Disabled and vulnerable beneficiary trusts – uniform definitions guidance note.

Aim and effect of the relief

The intended effect of the available relief is to tax the trust as if the income or gains had arisen directly to the vulnerable beneficiary. The income and capital gains tax rates and allowances applicable to trusts are generally less favourable than those applied to individuals. The aim of the relief was to remove the disadvantage of higher tax liabilities where property is held in trust for the benefit of a person who cannot manage his financial affairs.

Whether the reliefs are useful or not depends on the type of trust and how the fund is used. In any situation where trust income is passed on to the beneficiary, he will ultimately be taxed on it as if it were his personal income, provided he completes the necessary tax return or repayment claim. If the income is distributed the advantage of the vulnerable beneficiary income tax relief is not that it saves tax overall but that it avoids the rigmarole of the trustees paying tax and then the beneficiary claiming it back. See Example 1.

The position is different where income is accumulated because the

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