Vulnerable beneficiary trustsWhat is a vulnerable beneficiary trust?The category of ‘Trusts with vulnerable beneficiary’ was created by Finance Act 2005 to introduce special income tax and capital gains tax reliefs where property is held on trust for the benefit of a ‘vulnerable person’. A vulnerable person is either:•a disabled person (as defined below)•a ‘relevant minor’, defined as a young person who has not yet attained the age of 18, and at least one of his parents has diedThe definition of a ‘disabled person’ includes someone who:•cannot manage his own affairs because of mental disorder•is entitled to receive certain welfare benefits indicating a physical or mental disabilityFA 2005, s 38For the full definition and a list of the qualifying welfare benefits, see the Disabled and vulnerable beneficiary trusts – uniform definitions guidance note. Aim and effect of the reliefThe intended effect of the available relief is to tax the trust as if the income or gains had arisen directly to the vulnerable beneficiary. The income and capital gains tax rates and allowances applicable to trusts are generally less favourable than those applied to individuals. The aim of the relief was to remove the disadvantage of higher tax liabilities where property is held in trust for the benefit of a person who cannot manage his financial affairs.Whether the reliefs are useful or not depends on the type of trust and how the fund is used. In any situation where trust income is passed on to the beneficiary,
Disabled and vulnerable beneficiary trusts ― uniform definitionsIntroductionIt has long been recognised that special concessions are appropriate where property is held in trust for the benefit of a person who is unable to manage his financial affairs. Broadly, these concessions aim to treat the trust property as if it was owned outright by the individual, instead of applying special trust tax rules to it.Concessions have been introduced piecemeal with the result that the qualifying definitions and conditions were not consistent and at times contradictory.The Finance Act 2013 (and, for Scotland, the Social Security (Scotland) Act 2018) introduced amendments across the board to the tax legislation dealing with trusts for disabled persons and other vulnerable beneficiaries.In summary, the amendments:•updated the definition of a disabled person and applied it to all the relevant provisions•harmonised the qualifying conditions for all such trustsSpecial trust provisions for disabled persons and vulnerable beneficiariesThe provisions which are affected by these definitions are:Inheritance tax•trusts for bereaved minors ― see the Trusts for bereaved minors guidance note•age 18–25 trusts ― see the Age 18–25 trusts guidance note•the four types of disabled person’s trust ― see the Disabled person’s interest guidance noteCapital gains tax•hold-over relief available to settlor-interested disabled person’s trust ― see the Holdover relief for disposals by trustees guidance note•trust for a disabled person entitled to the full annual exemption ― see the Basic principles of CGT for trusts guidance note•special CGT treatment for vulnerable beneficiary trusts ― see
Calculation of vulnerable beneficiary reliefThis guidance note explains how income tax and capital gains tax relief for vulnerable beneficiary trusts is calculated and explains the effects of a claim in different circumstances. The qualifying conditions for the relief and procedure for making a claim for special tax treatment is described in the Vulnerable beneficiary trusts guidance note. The ‘special tax treatment’ is one claim for income tax and capital gains tax. You cannot choose to claim one without the other. However, the reliefs are calculated and declared on the tax return separately.Calculation of income tax reliefThe income tax concession for vulnerable beneficiary trusts is a tax reduction in the trustees’ income tax liability applied at Step 6 of the calculation of liability under ITA 2007, s 23. It is applied after any other reduction to which the trustees are entitled. The aim of the relief is to bring the trustees’ tax liability down to what the vulnerable beneficiary’s tax liability would be on the trust income if it had arisen to him directly.Essentially, the calculation involves a comparison of two amounts:•trustees’ income tax liability without relief (referred to in the legislation as TQTI)•the additional tax that the beneficiary would pay if the trust income were his income (referred to in the legislation as VQTI)The difference between the two is the amount of the relief. In other words, by applying the relief, TQTI becomes VQTI. FA 2005, s 26TQTI ― calculate the trust tax liability in the usual
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