IHTM42805 - Special trusts: trusts for disabled persons

Charging provisions: IHTM04102

Following the changes in Finance Act 2006 to the Inheritance Tax (IHT) rules for trusts, there are now four types of ‘disabled person’s interest’ under IHTA84/S89B. 

Transfers of value into trusts under IHT84/S89B(1)(a) and (1)(c) are potentially exempt transfers (PETs) under IHT84/S3A(1) and (1A)  (IHTM04057). Self-settlements into trusts under IHT84/S89B(1)(b) and (1)(d) are not chargeable occasions for IHT purposes because the property is treated as remaining in the settlor’s estate. 

Further changes were introduced by the Finance Act 2013: 

  • the definition of a ‘disabled person’ was aligned with changes introduced by the Welfare Reform Act 2012; 

  • removing the requirement that the trusts must secure that half of any settled property applied during the life of the disabled person must be applied for his benefit; and  

  • a power of advancement or such powers of a like effect to, and conferred by, section 32 Trustees Act 1925 (section 33 Trustees Act [Northern Ireland] 1958), enabling the trustees to apply capital or income to person(s) other than the disabled person, within a prescribed annual limit (the lower of £3,000 and 3% of the amount which is the maximum value of the settled property during a period of 12 months from 6 April in any one year), do not prevent treatment as a ‘disabled persons trust’. 

These changes have effect on or after 8 April 2013 for all property transferred into settlement, but do not affect additions to trusts established before this date. 

1.  An interest in possession to which a disabled person is treated as beneficially entitled, IHTA84/S89B(1)(a) 

This applies to property settled after 9 March 1981 in which there is no interest in possession (IIP), on trusts which secure that any of the settled property or income which is applied during the life of the disabled person must be applied for their benefit, IHTA84/S89(1)(b). 

IHTA84/S89 (2) provides that the disabled person is to be treated as beneficially entitled to an IIP in the settled property. The deemed IIP is treated as part of the disabled person’s estate for IHT purposes by virtue of IHTA84/S49(1) and (1A) and is subject to the normal claims and exemptions on death or on termination in lifetime (IHTM04082 onwards)

This special treatment of trusts can apply even if the disability ceases, for instance because the patient is restored to mental health or no longer receives an attendance allowance. It is sufficient that the person was within the conditions for ‘disabled’ treatment when the property was transferred into settlement, IHTA84/S89(4). 

A disabled person can set up a trust for themselves, possibly to hold proceeds of an insurance policy.  They have not disposed of a beneficial interest as they effectively retain an IIP, so there is no charge to IHT. 

2.  An interest in possession of a person expected to fall within the definition of ‘disabled person’ is treated under IHTA84/S89A(4) as beneficially entitled IHT84/S89B(1)(b) 

This applies to property settled on or after 22 March 2006 by a person who satisfies HMRC that they have a condition that could reasonably be expected to their becoming disabled. 

The property must be held on trusts under which there is no interest in possession (IIP) and, if any settled property or income arising from it is applied during the life of the settlor, it must be applied for their benefit. 

If the trusts can be brought to an end during the settlor’s life, then: 

  • The settlor or another person must become absolutely entitled to the settled property, or 

  • The settled property must become held on trusts that meet the conditions of a ‘disabled person’s interest’. 

IHTA84/S89A(4) provides that the settlor is to be treated as beneficially entitled to an IIP in the settled property. The deemed IIP is treated as part of settlor’s estate for IHT purposes by virtue of IHTA84/S49(1) and (1A) and is subject to the normal claims and exemptions on death or on termination in lifetime (IHTM04082 onwards)

Where it is claimed that IHT84/S89B(1)(b) – or S89B(1)(d) (see numbered paragraph 4 below) – is in point, we would expect to see evidence that the settlor was suffering at the time of the settlement from a condition that could reasonably be expected to lead to their becoming disabled within IHT84/S89(4)(a) to (c) – see the definitions below. 

3.  An interest in possession to which a disabled person is beneficially entitled, IHTA84/S89B(1)(c) 

This applies to actual interest in possession (IIP) to which a disabled person becomes beneficially entitled on or after 22 March 2006. The IIP forms part of the disabled person’s estate for IHT purposes by virtue of IHTA84/S49(1) and (1A) and is subject to the normal claims and exemptions on death or on termination in lifetime (IHTM04082 onwards)

4.  An interest in possession to which a person with a condition expected to lead to disability is beneficially entitled, IHTA84/S89B(1)(d) 

This applies to actual interests in possession (IIP), where property is settled on or after 22 March 2006 by a person who satisfies HMRC that they have a condition that could reasonably be expected to lead to their becoming disabled. 

The property must be held on trusts which secure that, if any settled property is applied during the life of the settlor, it must be applied for their benefit. 

The IIP forms part of the disabled person’s estate for IHT purposes by virtue of IHTA84/S49(1) and (1A) and is subject to the normal claims and exemptions on death or on termination in lifetime(IHTM04082 onwards)

Property settled before 10 March 1981 

IHTA84/S74 applies to property settled before 10 March 1981 and held on trusts under which, during the life of a disabled person, no interest in possession (IIP) subsists and which secure that any of the settled property which is applied during his life is applied ‘only or mainly for his benefit’. 

The trustees can exercise their powers of advancement under Trustees Act 1925/S32 to advance settled property to other objects provided the amount paid does not exceed half of the presumptive or vested interest of that trust fund. 

The implications for this type of trust are that the property is not treated as IIP and therefore the value of the fund does not aggregate with the free estate for the purposes of any death estate claim. 

The flat rate charge (IHTM42802) applies when

  • any property ceases to be held in the trust, otherwise than by a payment for the benefit of the disabled person, and
  • when the trustees make a disposition (other than a payment for the benefit of the disabled person) which reduces the value of the settled property.

Definition of disabled person 

A ‘disabled person’ has the meaning given by Schedule 1A to the Finance Act 2005.  

Defined as a person who 

  • is by reason of mental disorder, within the meaning of the Mental Health Act 1983, incapable of administering their own property or managing their own affairs, or 

  • a person in receipt of attendance allowance (Sch 1A, FA05, para 2), or 

  • a person in receipt of a disability living allowance by virtue of entitlement to either (a) the care component at the highest or middle rate, or (b) the mobility component at the higher rate (Sch 1A, FA05, para 3). 

  • a person in receipt of personal independence payment (Sch 1A, FA05, para 4), or 

  • a person in receipt of an increased disablement payment (Sch 1A, FA05, para 5), or 

  • a person in receipt of constant attendance allowance (Sch1A, FA05, para 6), or 

  • a person in receipt of armed forces independence payment (Sch1A, FA05, para 7). 

  • is in receipt of an attendance allowance under S64 of the Social Security Contributions & Benefits Act 1992 or of the Social Security Contributions & Benefits (Northern Ireland) Act 1992 (IHTA84/S89B(4)(b)), or 

  • is in receipt of a disability living allowance under S71 of those Acts by virtue of entitlement to the care component at the highest or middle rate (IHTA84/S89B(4)(c), or

  • is in receipt of pension age disability payment under section 31 of the Social Security (Scotland) Act 2018(2).  

The attendance allowance (above) is payable only to a person who 

  • is age 65 or over 

  • satisfies prescribed conditions as to residence and presence in Great Britain or Northern Ireland, and  

  • is not entitled to the care component of a disability living allowance, and 

  • is so severely disabled mentally or physically that he requires from another person: 

  • frequent attention throughout the day (or prolonged or repeated attention at night) in connection with his bodily functions, or 

  • continual supervision throughout the day or night in order to avoid substantial danger to himself or others. 

A person is entitled to the care component of a disability living allowance at the highest or middle rate if they 

  • satisfy prescribed conditions as to residence and presence in Great Britain or Northern Ireland, and 

  • are disabled such that 

  • they require frequent attention throughout the day, or for a significant portion of the day, in connection with their bodily functions, or 

  • they cannot prepare a cooked main meal for themselves if they have the ingredients, or 

  • they require continual supervision throughout the day in order to avoid substantial damage to themselves or others. 

The definition of a disabled person was extended by Finance Act 2006. The definition now includes individuals who are sufficiently disabled to have received the relevant allowances but did not meet the conditions because of non-residence in the UK or residence in ‘paid for’ accommodation.