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Trusts for Disabled People and Children

HM Revenue and Customs (HMRC) will apply special tax treatment to individuals who qualify for so-called 'trusts for vulnerable beneficiaries'.

This section explains how trusts work if the beneficiary is a bereaved minor or someone with a severe physical or mental disability.

Parental Trusts for Minors: 'Relevant Child'

Parents can set up a special trust for their children (under 18) as long as the child hasn't been married or lived in a civil partnership.

Because it won't qualify as a trust itself (per se), it is set up as (any):

Important: Another section contains detailed information on the common types of trust and how they work in Great Britain (England, Scotland, Wales) and Northern Ireland.

Who is Responsible for Paying Income Tax?

Assuming it generates a yield, the trustees will pay the Income Tax liabilities to HMRC. But, because the 'settlor' is responsible for putting assets into a trust:

Qualifying as Vulnerable Beneficiaries

There are two ways to qualify as a vulnerable beneficiary for trusts. You need to be a bereaved minor under the age of eighteen (18) or a disabled person eligible for one of these qualifying benefits (even if you do not claim them):

Individuals who are unable to manage their own affairs due to a mental health condition might also qualify. You should contact a medical professional covered by the Mental Health Act 1983 for further details.

Special Tax Treatment for Trusts

HMRC applies special Income Tax treatment to trusts that have been set up for vulnerable people. But, tax relief does not apply to the person setting it up, if they are able to benefit from income generated by the trust.

Often, children who have lost a parent(s) will have a trust already set up via an existing 'Will' (or by special rules of inheritance if no will exists).

Note: In Scotland, HMRC usually treats trusts for bereaved children as 'bare trusts' for taxation purposes if there is no will.

What if there are Multiple Beneficiaries?

Trusts for vulnerable people can have more than one beneficiary named in it. If so, the vulnerable beneficiaries' assets and income must be identified and kept separate from any beneficiaries not classed as 'vulnerable'. Thus, only this part would qualify for HMRC special tax treatment.

How to Claim the Special Tax Treatment?

Trustees would need to use 'vulnerable person election form (VPE1)' to make a claim for special treatment (e.g. Income Tax, Capital Gains Tax). Use separate forms if there is more than one vulnerable person.

The trustees would need to notify HM Revenue and Customs if any of the vulnerable people are no longer classed as 'vulnerable', or they die.

HMRC Trusts Helpline
Telephone: 0300 123 1072
Outside UK: +44 300 123 1072
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Closed weekends and bank holidays

How to Make Income Tax Deductions

Trustees get entitlement to a deduction of Income Tax when managing trusts for vulnerable beneficiaries. There are three basic steps to the calculation:

  1. The trustee(s) need to calculate how much their trust Income Tax would be if no claim was being made for special tax treatment. This rate varies according to the type of trust being managed.
  2. Next, they need to work out the amount of Income Tax the vulnerable person would have paid if they had received the earnings 'directly' (e.g. as the beneficiary).
  3. Hence, the amount the trustee(s) can claim would be the difference between the two figures, based as a deduction from their own liabilities for Income Tax.

In some cases, it can be a complex calculation to perform. But, HMRC produces detailed working examples in the Trusts, Settlements and Estates Manual.

Assets and Capital Gains Tax (CGT)

Assets held in trusts usually increase in value over time. So, selling or 'disposing of' (e.g. transferring ownership) trust assets can mean they become liable for Capital Gains Tax (CGT). Even so, the trustees would only pay tax if the value goes above the relevant 'Annual Exempt Amount'.

Despite having the responsibility for paying Capital Gains Tax, the trustees can claim a reduction if the trust is for vulnerable beneficiaries, by:

  1. Calculating how much they would need to pay if the reduction did not apply.
  2. Working out what amount the beneficiary would have paid if the gains had gone 'directly' to them.
  3. Using (form SA905) to claim the difference between the two amounts based as a reduction on the amount they would need to pay in Capital Gains Tax.

Important: The special treatment used for Capital Gains Tax would not apply in the tax year if the beneficiary died.

Special Inheritance Tax Treatment

Trusts for vulnerable people qualify for special treatment relating to Inheritance Tax when it involves:

However, the Inheritance Tax charge would not apply:

HM Revenue and Customs (HMRC) treats assets held in the trust as part of the estate. Thus, they may charge Inheritance Tax when the beneficiary dies.

Important: As a rule, trusts have Inheritance Tax charges for a period of up to ten (10) years (excluding trusts with vulnerable beneficiaries).

Related Help Guides

Note: The main section contains further information about how trusts and taxation works in the United Kingdom.

Trusts for Vulnerable People and Children in United Kingdom