Trusts for Vulnerable Persons Print
There is a special tax regime for qualifying Trusts with vulnerable beneficiaries. For these purposes a vulnerable person is regarded as someone who is disabled, or a person who is under 18 and at least one parent has died. A trust is a qualifying trust if it fulfils the following conditions:
In the case of a trust for a disabled person if during the lifetime of the disabled person or until such time as the trust is terminated:
- That the assets of the trust must be applied for the benefit of the disabled person; and
- Either the disabled person is entitled to all the income arising, or that no such income may be applied for the benefit of any other person.
In the case of a trust for the benefit of a person under 18 who has lost at least one parent, the trust must be either:
- A statutory trust arising out of the intestacy of the deceased parent’s estate;
- A trust created under the will of the deceased parent under which:
- The minor will become absolutely entitled to the assets of the trust on attaining the age of 18;
- During the intervening period, if any of the assets of the trust are applied for the benefit of a beneficiary, they are applied for the benefit of the minor;
- That the minor must be entitled to all the income of the trust, or that no income may be applied for the benefit of any other person.
Where the above conditions are satisfied, and a vulnerable person election is made, the amount of tax payable by the trust is reduced to an amount equal to the tax that would be payable by the beneficiary if the income arises directly to him. This effectively cuts out the need for the trustees to pay over tax that will eventually be recoverable by the beneficiary.
The main use of Trusts is for the protection of capital, and a brief description of the three main types of trust is set out below.
- Discretionary Trusts
- Accumulation and Maintenance (“A&M”) Settlements
- Interest in Possession Settlements
By using any of the above Settlements, the settlor will divest himself of assets, which may increase substantially in value whilst in the hands of the trustees, and thereby avoid the increased IHT that would otherwise arise on his death.
With regard to all the above trusts there are certain common anti-avoidance provisions, in particular, the following should be noted:
If the Settlor retains an interest in the trust, then for all income tax purposes the income of the trust is treated as the income of the settlor. In addition, any gains arising in the trust may also be assessable on the settlor. Furthermore, the settlor may also be liable to tax under the pre-owned assets legislation.
The Settlor cannot claim hold-over relief where the beneficiary is an unmarried minor child of the Settlor.
If, in any year, settlement income is paid for the benefit of an unmarried minor child including a stepchild or illegitimate child of the settlor, the income is treated as that of the settlor, subject to a de minimis limit of £100 per child.
There are many other applications in which trusts may be used tax efficiently. As discussed above, the use of overseas trusts has been countered by specific anti- avoidance legislation, but there are still significant tax saving opportunities.
It is imperative that proper professional advice is sought from the outset, and that the settlements created are structured properly. It should also be noted that where overseas trustees are appointed, their fees are likely to be more expensive than trustees of a UK based Settlement, and this should be taken into account when considering the creation of a Settlement.