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Any Answers answered: What is the definition of 'disabled person' under new trust law?By Matthew Hutton

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23rd Jul 2007
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Question: What is the definition of 'disabled person' for purposes of the Finance Act 2006 changes to the Inheritance Tax Treatment of Trusts?

Answer: the definition is (in broad terms): a person who

  • cannot administer his property or manage his affairs by reason of mental disorder; or
  • is in receipt of an attendance allowance, or
  • receives a disability living allowance through entitlement to the care component at the highest or middle rate.

    See IHTA 1984 s89(4)-(6).

The Four Categories
FA 2006 expands on the regime hitherto provided in IHTA 1984 s89 ‘Trusts for Disabled Persons’ by adding categories (ii), (iii) and (iv) below to the previous category (i).

(i)a settlement which falls within s89, necessarily a discretionary trust, is kept out of the ‘relevant property’ regime so long as the conditions remain satisfied. These are that during the life of a disabled person no interest in possession exists and not less than half of the settled property which is applied during his lifetime is applied for his benefit. For IHT purposes the trust property is treated as if the disabled person were beneficially entitled to an interest in possession;

(ii)an actual interest in possession made for a disabled person on or after 22 March 2006 (s 89B(1)(b));

(iii)a trust falling within new s89A ‘Self-settlement by person with condition expected to lead to disability’. Among the qualifying conditions in s89A, the settlor must satisfy HMRC that at the date of settlement he had a condition which it was then reasonable to expect would have such an effect as to lead him to become a ‘disabled person’ within the statutory meaning. However, under s89A, there must be no interest in possession during the settlor’s lifetime - if any of the settled property is applied during his life for the benefit of the beneficiary it must be applied for his benefit; and any power to bring the trust to an end during his lifetime must ensure either that the beneficiary or someone else will become absolutely entitled or a qualifying disabled person’s interest must exist; and

(iv)an actual interest in possession trust made on or after 22 March 2006 by a person on himself with the same reasonable expectation of disability (s 89B(1)(d)).

However, somewhat curiously, it is not open for a person to create a disabled person’s interest trust on another who has a reasonable expectation of disability. Such a trust would qualify as a disabled person’s interest only if at the time of making it the individual was a disabled person as defined: otherwise, the trust would fall within the ‘relevant property’ regime.

Note also that, whichever one of the four categories above is selected, the trust must satisfy the statutory conditions at outset if it is to qualify. That is, it is no good if at some time after commencement the primary beneficiary first becomes a disabled person or, within (iii) and (iv) above, first acquires the reasonable expectation of disability: the trust will be, and will remain, relevant property.

Capital Gains Tax
FA 2006 provides that a qualifying life interest for a person who is disabled or a self-settlement on a life interest by a person with a condition expected to lead to disability will attract the CGT-free uplift to market value on death. However, the anomaly with traditional s89 trusts continues, that is they are treated for IHT purposes as if the beneficiary were entitled to the underlying capital under s49(1), though for CGT purposes they are treated as the discretionary settlements they are, that is with no CGT-free uplift on the death of the beneficiary.

Concluding summary
The 'magic'of a qualifying trust for a disabled person within the new IHT Regime for Trusts is therefore that a gift to trustees of such a settlement continues to be a PET, ie no IHT implications whatever the amount settled, provided the settlor survives at least 7 years (assuming, of course, no reservation of benefit by the settlor!).

Matthew Hutton, who is running six full day Estate Planning conferences around England in September and October 2007. Contact: [email protected] for a brochure and further details.

Links to Matthew's recent articles:
Inheritance tax and trusts: The impact of Finance Act 2006 Part 1
This article explains, the changes made by last year’s Finance Act .

Inheritance tax and trusts: The impact of Finance Act 2006 Part 2
Part 2 of this feature summarises the transitional rules for interest in possession and A&M Trusts in being at Budget Day 2006 and highlights those cases where action is required, concluding with a brief look at Capital Gains Tax and Income Tax.

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