CG18050 - Annual exempt amount: settlements for disabled persons

The trustees of settlements for certain disabled persons may be entitled to the main annual exempt amount (“AEA”). For the meaning of ‘settlement’ see CG33280+. 

The main AEA is available to trustees of a settlement which exists for the benefit of a disabled person. In accordance with Para.3 Sch.1C, this is a settlement under which, over the lifetime of the disabled person, both the property and income tests are met. 

The property test is met if any of the property which is applied for the benefit of a beneficiary is applied for the disabled person’s benefit, see Para.3(2) Sch.1C. 

The expression ‘property which is applied’ refers to the exercise of powers of appointment or advancement by the trustees to take property outside the settlement. It should not be regarded as covering the situation where a beneficiary becomes absolutely entitled to the property on the occurrence of an event such as the death of a life tenant. 

The income test is set out at Para.3(3) Sch.1C. 

The main AEA will be available for a tax year even if the conditions are satisfied only for part of the year. It is also not necessary for the beneficiary to have been within one of the specified classes of a ‘disabled person’, see Sch.1A FA05, at the time when the settlement was made. 

A Trust will not fail to meet the property and income tests merely because: 

  • the trustees have the power to apply amounts otherwise than for the disabled person’s benefit that do not exceed the limit for that year (the lower of £3,000 or 3% of the maximum value of the settled property during the tax year).

It will not normally be apparent that the beneficiary of a trust is a disabled person. You should assume that trustees qualify only for the trust AEA unless they can demonstrate that they are entitled to the main AEA. 

Two or more qualifying UK settlements 

Where a settlor has made two or more qualifying UK settlements in a group which are mainly for the benefit of one or more disabled persons, the AEA is restricted. The AEA is divided between the number of settlements in the group, subject to the proviso that if there are ten or more settlements, then the AEA for each settlement is one-tenth of the main AEA, see Para.6(2) Sch.1C.  

Mixed Settlements 

It is possible that only part of a settlement may fulfil the qualifying conditions. If a specified part of the settlement itself meets the conditions, then the trustees of the settlement are entitled to the main AEA. Para.3(1) Sch.1C refers to ‘settled property’ and not to ‘all the settled property comprised in the settlement.’ 

Protective Trusts 

A protective trust under s33 Trustee Act 1925 is one whereby an individual has an interest in possession in the settled property for their lifetime or until a particular event occurs, such as the bankruptcy of the beneficiary. In the event that the interest in possession is brought to an end by bankruptcy or similar event, it is replaced by a discretionary trust held for the benefit of a wider class of beneficiaries, often including the beneficiary and their immediate family. In such a case the reference to the beneficiary’s lifetime in CG18050 should be treated as a reference to the period during which the interest in possession continues.  

Statutory Definitions 

The following statutory definitions are of relevance when considering settlements for disabled persons: 

‘Mentally disabled person’: an individual incapable of administering his or her property or managing his or her affairs because of mental disorder as defined by the Mental Health Act 1983. 

‘Attendance Allowance’: an allowance under s64 Social Security Contributions and Benefits Act 1992 or s64 Social Security Contributions and Benefits (Northern Ireland) Act 1992. 

‘Disability Living Allowance’: an allowance under s71 Social Security Contributions and Benefits Act 1992 or s71 Social Security Contributions and Benefits (Northern Ireland) Act 1992.