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Some trusts for disabled people or children get special tax treatment. These are called 鈥榯rusts for vulnerable beneficiaries鈥�.

Who qualifies as a vulnerable beneficiary

A vulnerable beneficiary is either someone under 18 whose parent has died or a disabled person who is eligible for any of the following benefits (even if they do not receive them):

• Armed Forces Independence Payment
• Attendance Allowance
• Constant Attendance Allowance
• Disability Living Allowance for adults
• Disability Living Allowance for children
• Industrial Injuries Disablement Benefit
• Personal Independence Payment

A vulnerable beneficiary can also be someone who is unable to manage their own affairs because of a mental health condition - check with a medical professional that it鈥檚 covered by the Mental Health Act 1983.

Trusts that qualify for special tax treatment

A trust does not qualify for special Income Tax treatment if the person setting it up can benefit from the trust income. However, from 2008 to 2009 it would qualify for special Capital Gains Tax treatment.

Trusts for children who鈥檝e lost a parent are usually set up by the parent鈥檚 will, or by special rules of inheritance if there鈥檚 no will.

If there鈥檚 more than one beneficiary

If there are beneficiaries who are not vulnerable, the assets and income for the vulnerable beneficiary must be:

• identified and kept separate
• used only for that person

Only that part of the trust gets special tax treatment.

Claiming special tax treatment

To claim special treatment for Income Tax and Capital Gains Tax, the trustees have to fill in the 鈥榁ulnerable Person Election鈥� form.

If there鈥檚 more than one vulnerable beneficiary, each needs a separate form.

If the vulnerable person dies or is no longer vulnerable, the trustees must tell HMRC.

Income Tax

In a trust with a vulnerable beneficiary, the trustees are entitled to a deduction of Income Tax. It鈥檚 calculated like this:

1. Trustees work out what their trust Income Tax would be if there was no claim for special treatment - this will vary according to which type of trust it is.

2. They then work out what Income Tax the vulnerable person would have paid if the trust income had been paid directly to them as an individual.

3. They can then claim the difference between these 2 figures as a deduction from their own Income Tax liability.

This is a complicated calculation but there鈥檚 a on the HMRC website.

Capital Gains Tax

Capital Gains Tax may be due if assets are sold, given away, exchanged or transferred in another way and they鈥檝e gone up in value since being put into trust.

Tax is only paid by trustees if the assets have increased in value above the the trust鈥檚 tax-free allowance (called the 鈥榓nnual exempt amount鈥�).

For the 2024 to 2025 tax year, the tax-free allowance for trusts is:

• 拢3,000 for vulnerable beneficiaries
• 拢1,500 for other trustees

Trustees are responsible for paying any Capital Gains Tax due. If the trust is for vulnerable people, trustees can claim a reduction, which is calculated like this:

1. They work out what they would pay if there was no reduction.

2. They then work out what the beneficiary would have to pay if the gains had come directly to them.

3. They can claim the difference between these 2 amounts as a reduction on what they have to pay in Capital Gains Tax using form SA905.

Inheritance Tax

These are the situations when trusts for vulnerable people get special Inheritance Tax treatment:

• for a disabled person whose trust was set up before 8 April 2013 - at least half of the payments from the trust must go to the disabled person during their lifetime
• for a disabled person whose trust was set up on or after 8 April 2013 - all payments must go to the disabled person, except for up to 拢3,000 per year (or 3% of the assets, if that鈥檚 lower), which can be used for someone else鈥檚 benefit
• when someone who has a condition that鈥檚 expected to make them disabled sets up a trust for themselves
• for a bereaved minor - they must take all the assets and income at (or before becoming) 18

There鈥檚 no Inheritance Tax charge:

• if the person who set up the trust survives 7 years from the date they set it up
• on transfers made out of a trust to a vulnerable beneficiary

When the beneficiary dies, any assets held in the trust on their behalf are treated as part of their estate and Inheritance Tax may be charged.