Understanding Vulnerable Person’s Trusts

A Vulnerable Person’s Trust (VPT) is a special type of trust designed to benefit individuals who are considered vulnerable, such as disabled persons or children under the age of 18 whose parents have passed away. These trusts were introduced to ensure that vulnerable individuals receive proper financial support while also offering tax benefits that protect both the individual and the trustee from adverse tax implications. 

What is a Vulnerable Person’s Trust? 

A VPT is structured specifically for individuals who are considered unable to manage their financial affairs independently due to their vulnerability. This typically includes the following. 

• Disabled persons: someone who is entitled to specific disability benefits, such as Disability Living Allowance (DLA), Personal Independence Payment (PIP), or Attendance Allowance. 

• Bereaved minor: a child under the age of 18 whose parents have passed away. 

The key feature of a VPT is that it enables the vulnerable individual to benefit from assets placed in trust, while a trustee oversees the administration and management of these assets. This ensures that the funds are properly protected and used for the benefit of the vulnerable person. 

Tax benefits of Vulnerable Person’s Trusts 

One of the main attractions of setting up a VPT is the favourable tax treatment it provides. Generally, trusts are subject to multiple layers of taxation, including Income Tax, Capital Gains Tax (CGT), and Inheritance Tax (IHT). However, VPTs are granted significant tax reliefs that reduce the potential tax burdens. 

1. Income Tax relief 

For regular trusts, the trustees are liable to Income Tax at the highest rates (45% on dividends and 38.1% on other income). However, in the case of a VPT, tax relief allows the income to be taxed at the same rate as if the vulnerable person were receiving it directly. This typically results in a much lower tax liability, as the tax rates for individuals are lower than those for trustees. Additionally, the trustees may claim a tax rebate if they have paid tax at a rate higher than that applicable to the vulnerable person. 

2. Capital Gains Tax relief 

CGT is normally payable on the increase in value of assets within a trust when they are sold or transferred. In a standard trust, CGT is applied at a rate of 28% for trustees. However, for VPTs, the tax can be mitigated so that the CGT is calculated as if the vulnerable person themselves were the owner of the assets. This means that CGT is charged at the lower individual rates (10% or 20% depending on total income and gains), and the annual CGT allowance for individuals (£6,000 as of 2023/24) can also be used. 

3. Inheritance Tax exemptions 

VPTs also benefit from relief on IHT. For most discretionary trusts, IHT charges may apply every ten years and on exit events, but in the case of a VPT, these charges can be reduced or entirely eliminated. If the trust is properly structured and the vulnerable person is the primary beneficiary, no IHT may be payable on the assets in the trust, even when they are passed on after the vulnerable person’s death. 

Considerations when setting up a Vulnerable Person’s Trust 

Although the tax advantages of VPTs are considerable, there are specific conditions and regulations that need to be met for the trust to qualify. For instance, the trust must be set up primarily for the benefit of the vulnerable person, and strict reporting requirements must be adhered to in order to maintain its tax-advantaged status. 

The Vulnerable Person’s election 

One key step in establishing the tax advantages of a VPT is making the Vulnerable Person’s election. This election must be made by the trustees and the vulnerable person (or their representative) and submitted to HM Revenue & Customs (HMRC). The purpose of the election is to formally identify the trust as being set up for a vulnerable person, ensuring that the trust can benefit from the favourable tax treatment. 

The election is vital to secure Income Tax and CGT relief. It can be submitted at any time, but the tax benefits will only apply from the start of the tax year in which the election is made. Therefore, it is advantageous to make the election as soon as possible after the trust is set up. The election remains valid for the entire duration of the vulnerable person’s life or until they cease to meet the qualifying conditions (such as no longer receiving disability benefits). 

Failure to make the Vulnerable Person’s election means the trust will be taxed as a standard discretionary trust, subject to higher tax rates and potentially losing out on the reliefs that the election provides. 

VPTs offer a valuable financial planning tool for families with disabled individuals or bereaved minors. They provide essential protection and support, while offering significant tax relief that reduces financial strain and preserves more of the trust’s assets for the vulnerable person’s benefit. Setting up a VPT can provide peace of mind for families looking to ensure the long-term care of a loved one, while also minimising the tax burden. 

The Birketts view 

Birketts’ private client advisory team can advise on the tax implications of setting up VPTs, create these trusts and advise in relation to the ongoing tax and administrative requirements of the trust. 

There are a number of other factors to consider when putting in place any type of trust, such as who should be the trustees and what assets the trust will hold.