Disabled Person Trusts

Disabled Person Trusts used for asset protection and tax savings

Trusts are often established by persons hoping to reduce the value of their own estate whilst retaining some control over the assets gifted. It is difficult to achieve both those aims with an ‘outright gift’.

However, most gifts into trust are ‘chargeable transfers’ for Inheritance Tax purposes, so if the current ‘nil rate band’ for such gifts is exceeded (currently £325000)  a lifetime charge to Inheritance Tax can result for the donor.

Whilst the tax rate payable is only half the 40% currently payable on death, it would nevertheless be better avoided entirely and a gift into a disabled persons trust is the one occasion where this is possible. Such a gift is instead treated as a ‘potentially exempt transfer’ and can only trigger an IHT charge in the event that the donor dies within 7 years of making the gift.

It is therefore possible to gift unlimited sums to a disabled persons trust without incurring any tax charge, but nevertheless remove the asset from your estate, and retain control of the asset.

A disabled persons trust also benefits from significant income tax benefits as detailed in our Vulnerable Persons trusts – income and capital gains tax benefits example.

It is important to note that the definition of a ‘disabled persons trust’ is very strict, and no income can be applied for the benefit of non-disabled beneficiaries; however it is permissible to apply ‘small amounts’ of capital for the benefit of  other beneficiaries, without prejudicing its favoured status. That small amount (or 'annual limit') is the lower of £3,000 and 3% of the maximum  value of the settled property during the period in question.

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