An unfortunate proposal

01 May 2013 Alex Elphinston

An unfortunate proposal

Alex Elphinston highlights changes to trusts for disabled people and vulnerable beneficiaries in the UK.

Successive UK governments have recognised that parents and others will not want to leave assets outright to beneficiaries who have disabilities, even once they attain a certain age. Various reliefs have therefore been included in the tax system to recognise this. These have, however, been introduced in a piecemeal manner. As a result, the rules are complex and not particularly complementary.

For these purposes the definition of ‘disabled’ has included, among other categories, receipt of certain aspects of disability living allowance (DLA).

Under the Welfare Reform Act 2012, DLA is to be replaced with the personal independence payment (PIP) for claimants of working age (16-64), between April 2013 and March 2016. PIP will have two components – mobility and daily living – and will be awarded at either a standard or an enhanced rate, based on whether a claimant’s activities are limited or severely limited.

HMRC therefore opened consultations on vulnerable beneficiary trusts to include a review of the tax treatment of these trusts. The outcome of the consultation is that those in receipt of:

  • the daily living component of PIP at either standard or enhanced rate;
  • constant attendance allowance; or
  • armed forces independent payment.

will be included in the class of vulnerable beneficiaries found in a new Schedule 1A to the Finance Act 2005. There are, of course, plenty of vulnerable people for whom trusts are created who do not fall within the categories.

It is expected that fewer people will qualify for PIP than for DLA. Awards of PIP are to be reviewed more regularly. This means a person may qualify for PIP one year but not the next. Since the income tax and capital gains tax reliefs are based on qualification for the tax year in question, it could make planning more complex.

The consultation resulted in a draft schedule to this year’s Finance Bill that goes some way to harmonising the treatment of disabled trusts for the different taxes. However, significant flexibility is to be removed in certain cases. In the future it will be possible to benefit a beneficiary other than the disabled person only to a very limited extent. This is to be the lower of GBP3,000 and 3 per cent of the maximum value of the settled property during the period in question. The ‘period in question’ will be a tax year. The Treasury may specify circumstances in which these provisions are not to apply in relation to a trust, and also change the specified amount. There will be no carry-forward facility. The payment can be of capital or income, or a mixture.

There will be grey areas as to whether a payment to a carer or other family member benefits the disabled person. Clearly it is also going to be difficult to establish the maximum value of the settled property during a tax year if the payment is being made in July. A further difficulty could be situations where trustees are unaware of the change in the legislation and there has been a change in the trusts since 8 April 2013. In those circumstances a payment to a third party – exceeding the above thresholds – will have adverse consequences.

There is a form of ‘grandfathering’ to cover settlements created before 8 April 2013 if ‘no alterations have been made to the trusts on or after that date’. Addition of funds will not be an alteration. This also applies to wills made before 8 April 2013.

The changes also apply to trusts for bereaved minors and age 18–25 trusts. These trusts were a creation of the Finance Act 2006. These most commonly arise under wills of parents making provision for their young children. The first draft of the proposed changes suggested that the mere inclusion of s32 of theTrustee Act 1925 would prevent the trusts from meeting the relevant criteria. Thankfully, the second draft of the proposed changes (found in Schedule 42 of the Finance (No 2) Bill issued after the Budget) has removed this risk.

In conclusion, there has been some harmonisation, but many complexities remain.

Authors

Alex Elphinston

CPD Reflective Learning