Section 216, Schedule 44: Vulnerable Beneficiary Trusts
Summary
1.Section 216 introduces Schedule 44, which:
extends the definition of ‘disabled person’ for the purposes of a trust with a vulnerable beneficiary to include individuals in receipt of personal independence payment by virtue of entitlement to the daily living component, armed forces independence payment or constant attendance allowance, including by way of an increase in disablement pension;
ensures that a person remains a ‘disabled person’ if he or she would be entitled to receive a qualifying welfare benefit were it not for them being in a publicly funded institution (such as a hospital) or abroad; and,
harmonises rules that limit how the capital and income of these trusts may be applied.
Details of the Schedule
2.Paragraph 1 provides for the amendment of the Inheritance Act (IHTA) 1984.
3.Paragraph 2 amends section 71A of IHTA 1984.
4.Subparagraph (2) amends section 71A(3)(c)(ii) to provide that any of the trust income that is applied is to be applied for the benefit of the bereaved minor.
5.Subparagraphs (3) and (4) add new sections 71A(4)(za) and (4A) to (4E) to IHTA 1984, which provide that powers that enable trustees to apply in a tax year up to an ‘annual limit’ of the lower of £3,000 or 3% of the maximum value of the settled property in that period for the benefit of persons other than the bereaved minor do not disqualify a trust from being a qualifying trust for the benefit of a bereaved minor. The amounts and circumstances may be amended by Treasury order.
6.Paragraph 3 amends section 71B of IHTA 1984 to provide that payments within the annual limit do not give rise to a charge to inheritance tax.
7.Paragraph 4 amends section 71D of IHTA 1984.
8.Subparagraph (2) amends section 71D(6)(c)(ii) to provide that any of the trust income that is applied is to be applied for the benefit of the person aged between 18 and 25.
9.Subparagraph (3) adds new section 71D(6A) to IHTA 1984, which make provision in relation to protective trusts.
10.Subparagraphs (4) and (5) add new sections 71D(7)(za) and (7A) to (7E) to IHTA 1984, which provide that powers that enable trustees to apply in a tax year up to an ‘annual limit’ of the lower of £3,000 or 3% of the maximum value of the settled property in that period for the benefit of persons other than the person aged between 18 and 25 does not disqualify a trust from being a qualifying trust for the benefit of a person aged between 18 and 25. The amounts and circumstances may be amended by Treasury order.
11.Paragraph 5 amends section 71E of IHTA 1984 to provide that payments within the annual limit do not give rise to a charge to inheritance tax.
12.Paragraph 6 amends section 89 of IHTA 1984.
13.Subparagraph (2) amends section 89(1)(b) to provide that any of the settled property or income that is applied is to be applied for the benefit of the disabled person.
14.Subparagraph (3) adds new sections 89(3) to (3E), which provide that powers that enable trustees to apply in a tax year up to an ‘annual limit’ of the lower of £3,000 or 3% of the maximum value of the settled property in that period for the benefit of persons other than the disabled person do not disqualify a trust from being a qualifying trust for the benefit of a disabled person. The amounts and circumstances may be amended by Treasury order.
15.Subparagraphs (4) and (5) amend the definition of a disabled person and define it as having the meaning given by new Schedule 1A to the Finance Act 2005 (introduced at paragraph 19 to this Schedule).
16.Paragraph 7 amends section 89A of IHTA 1984.
17.Subparagraph (2) applies to section 89A the new definition of disabled person at new Schedule 1A to the Finance Act 2005.
18.Subparagraph (3) amends section 89A(2) to provide that any of the trust income that is applied is to be applied for the benefit of the disabled person.
19.Subparagraph (4) amends sections 89A(5) and (6) to include the assumption that the beneficiary is entitled to receive personal independence payment when resident outside the UK or in a care home, hospital or prison.
20.Subparagraph (5) adds new sections 89A(6A) to (6F), which provide that powers that enable trustees to apply in a tax year up to an ‘annual limit’ of the lower of £3,000 or 3% of the maximum value of the settled property in that period for the benefit of persons other than the person with a condition expected to lead to a disability do not disqualify a trust from being a qualifying trust for the benefit of a person with a condition expected to lead to a disability. The amounts and circumstances may be amended by Treasury order.
21.Subparagraph (6) amends section 89A(8) to include a definition for “WRA 2012" (the Welfare Reform Act 2012).
22.Subparagraph (7) amends the heading to section 89A in recognition that a person may be disabled at the time of self-settlement, but not a ‘disabled person’ as defined.
23.Paragraph 8 amends section 89B of IHTA 1984.
24.Subparagraph (2) applies to section 89B the new definition of disabled person at new Schedule 1A to the Finance Act 2005.
25.Subparagraph (3) makes provision in relation to protective trusts.
26.Paragraph 9 provides for the commencement of paragraphs 2 to 8.
27.Subparagraph (2) ensures that sections 89 and 89A of IHTA 1984 continue to apply to property transferred on or after 8 April 2013 to settlements that were created before and which have remained unchanged since that date, or that arise after that date under a will executed before, or under a will in the same terms as a will executed before, that date.
28.Paragraph 10(1) and (2) amends section 89B and adds new section 89C to IHTA 1984, which provide that any of the settled property that is applied is to be applied for the benefit of the disabled person; and that powers that enable trustees to apply in a tax year up to an ‘annual limit’ of the lower of £3,000 or 3% of the maximum value of the settled property in that period for the benefit of persons other than the disabled person do not disqualify a trust from being a qualifying trust for the benefit of a disabled person. The amounts and circumstances may be amended by Treasury order.
29.Paragraphs 10(3) and (4) provide that new section 89C commences from Royal Assent and for transition.
30.Paragraph 11 provides for the amendment of the Taxation of Chargeable Gains Act (TCGA) 1992.
31.Paragraph 12 amends section 169D of TCGA 1992.
32.Subsection 2 amends section 169D(3) to provide that any of the settled property that is applied is to be applied for the benefit of the disabled person; and that any of the trust income that is applied is to be similarly applied for the benefit of the disabled person or that the disabled person is entitled to all of the income.
33.Subparagraph (3) adds new sections 169D(4A) to (4F), which make provision in relation to protective trusts; and provide that powers that enable trustees to apply in a tax year an ‘annual limit’ of up to the lower of £3,000 or 3% of the maximum value of the settled property in that period for the benefit of persons other than the disabled person do not disqualify a trust from being a qualifying trust for the benefit of a disabled person. The amounts and circumstances may be amended by Treasury order.
34.Subparagraph (4) applies to section 169D the new definition of disabled person at new Schedule 1A to the Finance Act 2005.
35.Subparagraph (5) omits subsection 169D(10) in consequence of new subsection 169D(4B).
36.Subparagraph (6) provides for the commencement of paragraph 12.
37.Subparagraph (7) ensures that section 169D(2) continues to apply for settlements created before 8 April 2013 which have remained unchanged since that date, or that arise after that date under a will executed before, or under a will in the same terms as a will executed before, that date.
38.Paragraph 13 amends paragraph 1 of Schedule 1 to TCGA 1992.
39.Subparagraph (2) provides that any of the settled property that is applied is to be applied for the benefit of the disabled person; and that any of the trust income that is applied is similarly to be applied for the benefit of the disabled person or that the disabled person is entitled to all of the income.
40.Subparagraph (3) adds new paragraphs 1(1A) to (1E), which provide that powers that enable trustees to apply in a tax year up to an ‘annual limit’ of the lower of £3,000 or 3% of the maximum value of the settled property in that period for the benefit of persons other than the disabled person do not disqualify a trust from being a qualifying trust for the benefit of a disabled person. The amounts and circumstances may be amended by Treasury order.
41.Subparagraph (4) amends paragraph 1(2) in consequence of new paragraph 1(1A).
42.Subparagraph (5) applies to paragraph 1the new definition of disabled person at new Schedule 1A to the Finance Act 2005.
43.Subparagraph (6) provides for the commencement of paragraph 10.
44.Subparagraph (7) ensures that sections 3(1) to (5C) and 3A continue to apply for settlements provided for under paragraph 1(1) of Schedule 1 to the TCGA 1992, created before 8 April 2013 and which have remained unchanged since that date, or that arise after that date under a will executed before, or under a will in the same terms as a will executed before, that date.
45.Paragraph 14 provides for the amendment of the Finance Act (FA) 2005.
46.Paragraph 15 amends section 34 of FA 2005.
47.Subparagraph (2) provides that any of the trust income that is applied is to be applied for the benefit of the disabled person or that the disabled person is to be entitled to all of the income.
48.Subparagraph (3) substitutes new sections 34(3) to (3E) for section 34(3), which provide that powers that enable trustees to apply in a tax year up to an ‘annual limit’ of the lower of £3,000 or 3% of the maximum value of the settled property in that period for the benefit of persons other than the disabled person do not disqualify a trust from being a qualifying trust for the benefit of a disabled person. The amounts and circumstances may be amended by Treasury order.
49.Paragraph 16 amends section 35 of FA 2005.
50.Subparagraph (2) amends section 35(3)(c)(ii) to provide that any of the trust income that is applied is to be applied for the benefit of the bereaved minor.
51.Subparagraph (3) substitutes new sections 35(4) to (4E) for section 35(4), which provide that powers that enable trustees to apply in a tax year up to an ‘annual limit’ of the lower of £3,000 or 3% of the maximum value of the settled property in that period for the benefit of persons other than the bereaved minor do not disqualify a trust from being a qualifying trust for the benefit of a bereaved minor. The amounts and circumstances may be amended by Treasury order.
52.Paragraph 17 holds that the meaning of “disabled person” is that given by new Schedule 1A to the Finance Act 2005.
53.Paragraph 18 provides for the commencement of paragraphs 15 to 17.
54.Paragraph 19 inserts new Schedule 1A to FA2005.
55.Paragraph 1 of new Schedule 1A provides a list of the various meanings of “disabled person”.
56.Paragraphs 2 to 7 of new Schedule 1A treat a person as a disabled person if he or she would be entitled to receive a relevant payment or allowance were it not for them being resident outside the UK or in a care home, hospital or prison.
57.Paragraph 8 of new Schedule 1A defines various terms used in the Schedule.
58.Paragraph 20 defines “relevant settlement” for the purposes of paragraphs 9(2), 12(7) and 13(7).
Background
59.Special tax rules exist for trusts for the benefit of a vulnerable beneficiary. The rules:
reduce, following an election and annual claim, the trustees’ tax liability on income and chargeable gains to an amount that, broadly, would be chargeable on the beneficiary if the gains had accrued and/or the income had arisen directly to that person;
extend the annual exempt amount of chargeable gains that applies to trusts to match that available to individuals;
ignore the normal charges to inheritance tax for trusts; instead, the property is treated as part of the beneficiary’s estate on their death.
60.The Welfare Reform Act 2012 introduces personal independence payment, which will replace disability living allowance (DLA) for working age people (16 to 64). The existing definition of a vulnerable beneficiary for tax purposes relies in part on whether the person is in receipt of DLA, so a new definition is required.
61.Current limitations on how the income and capital of a qualifying vulnerable beneficiary trust can be applied differ between taxes. In some cases, up to 50% of the capital can be applied for the benefit of a person other than the vulnerable person without the loss of the favourable tax position.
62.HMRC consulted on the changes brought into effect by this Schedule between 17th August and 8th November 2012.
