Definition
A Disabled Person's Trust is a legal arrangement that holds assets for someone with a qualifying disability, protecting their eligibility for means-tested benefits while providing significant inheritance tax advantages.
Planning for a disabled family member's future requires balancing financial support with benefit protection. This specialized trust structure achieves both objectives while avoiding the periodic tax charges that affect standard trusts.
What Does Disabled Person's Trust Mean?
A Disabled Person's Trust isn't a specific trust structure—it can be discretionary, interest-in-possession, or absolute. What makes it 'disabled' is that the principal beneficiary qualifies as a 'vulnerable beneficiary' under UK tax law, as defined in Section 89B(1) of the Inheritance Tax Act 1984 and Sections 23-45 of the Finance Act 2005. This qualification brings exceptional tax treatment and, crucially, allows assets to be managed for the beneficiary without counting toward means-tested benefit thresholds. The trust must primarily benefit the disabled person during their lifetime, though other beneficiaries can receive up to £3,000 or 3% of the fund value annually—whichever is lower.
The beneficiary qualifies if they receive specific disability benefits including Personal Independence Payment (PIP), Disability Living Allowance at the middle or higher care rate or higher mobility rate, Employment and Support Allowance (ESA), Attendance Allowance, Armed Forces Independence Payment, or similar qualifying benefits. Alternatively, they qualify if they're unable to manage their own affairs due to a mental disorder within the meaning of the Mental Health Act 1983. The trust works by keeping assets in the trustees' names rather than the beneficiary's. Consider Sarah, who receives PIP and ESA totaling £10,400 annually and has savings of £4,000. When her parents die leaving her £180,000 outright, she immediately exceeds the £16,000 capital threshold for means-tested benefits, losing approximately £7,800 yearly in ESA and Housing Benefit. With a Disabled Person's Trust instead, trustees hold the £180,000, Sarah's personal capital remains at £4,000, and her benefits continue unchanged. Trustees purchase goods and services directly—an adapted vehicle, annual holidays, physiotherapy, home adaptations—without increasing Sarah's personal capital or affecting her benefit eligibility.
The tax advantages are substantial. Unlike standard discretionary trusts, which face a 20% inheritance tax entry charge on amounts over £325,000, a 6% charge every 10 years, and exit charges when distributing capital, Disabled Person's Trusts are exempt from all these. A £400,000 trust would normally pay £4,500 in anniversary charges every decade; over 40 years, that's £18,000 saved. Trustees can elect for income tax and capital gains tax to be calculated as if the disabled beneficiary owned the assets personally—given most disabled people have low incomes, this typically means nil or basic-rate tax rather than the trust rate of 39.35% on income over £1,000. When the disabled beneficiary dies, trust assets do form part of their estate for inheritance tax purposes, but most disabled people have minimal personal wealth, so combined value often remains within the nil-rate band.
Common Questions
"My daughter receives PIP and lives in supported accommodation—if I leave her £150,000 in my will, will she lose her benefits?"
Yes, likely. If she receives means-tested benefits like Universal Credit, ESA, or Housing Benefit, capital over £16,000 disqualifies her completely, while capital between £6,000-£16,000 reduces payments. A Disabled Person's Trust avoids this by keeping assets in the trust's name, not hers, funding her needs directly without affecting benefit eligibility.
"What's the difference between leaving money to my son's sister to 'look after him' versus setting up a Disabled Person's Trust?"
Leaving money to a sibling with informal instructions is legally risky. The sibling legally owns that money—if they divorce, face bankruptcy, or pass away, those funds could be lost entirely. A Disabled Person's Trust legally obligates trustees to use funds for your son's benefit, protects against creditors and relationship breakdowns, and maintains his benefit eligibility.
"My adult son has learning disabilities and can't manage money—can I set up this trust now, or does it have to be in my will?"
You can establish a Disabled Person's Trust during your lifetime and transfer assets into it immediately. This 'lifetime trust' lets you see it operating, ensure trustees work well together, and provide for your son's needs now. The same tax benefits apply whether the trust is created during your lifetime or through your will.
Common Misconceptions
Myth: All trusts automatically protect state benefits—I just need to leave money 'in trust' for my disabled child.
Reality: Not all trusts protect means-tested benefits. An absolute trust, where the beneficiary has an immediate, unconditional right to the assets, counts toward benefit thresholds because legally, the beneficiary owns the assets. Only discretionary-style trusts—where trustees control distributions and no beneficiary has automatic entitlement—keep assets off the beneficiary's balance sheet for benefits assessment. The trust deed must be carefully drafted to ensure discretionary structure and trustee flexibility.
Myth: Once assets are in a Disabled Person's Trust, the disabled person can never access any money directly without losing their benefits.
Reality: While large lump sum payments directly to the beneficiary would count as their capital and potentially affect benefits, trustees can purchase goods and services directly on the beneficiary's behalf—specialist equipment, home adaptations, holidays, vehicles, therapy—without any impact on benefits. The £6,000 capital threshold provides a buffer for small, reasonable payments for immediate needs. Professional trustees understand how to navigate this balance while maximizing benefit to the disabled person.
Related Terms
Understanding Disabled Person's Trust connects to these related concepts:
- Trust: Disabled Person's Trust is a specific application of the broader trust concept; understanding basic trust principles (settlor, trustee, beneficiary) is essential before grasping specialized rules for vulnerable beneficiaries.
- Trustee: Trustees play an especially critical role because they must navigate benefits rules, exercise discretion sensitively, and often manage assets for decades with heightened responsibilities.
- Discretionary Trust: Most Disabled Person's Trusts are structured as discretionary trusts to protect benefits; understanding discretionary mechanics (no automatic beneficiary entitlement, trustee discretion) is essential to understanding benefits protection.
- Vulnerable Beneficiary Trust: The official HMRC term that encompasses disabled persons and bereaved minors, defining the broader classification under which Disabled Person's Trusts qualify for special tax treatment.
Related Articles
- What Is a Trust? (And How Do They Work in Wills?): This foundational article explains trust concepts essential for understanding how Disabled Person's Trusts separate legal ownership from beneficial ownership to protect means-tested benefits.
- Discretionary Trusts in Wills Explained: Explains discretionary trust mechanics in detail and why this structure is usually chosen for Disabled Person's Trusts to maximize benefits protection through trustee discretion.
- Using a Deed of Variation to Change a Will: If a will leaves assets directly to a disabled person, beneficiaries can use a Deed of Variation within two years of death to redirect the inheritance into a Disabled Person's Trust retrospectively.
- Appointing Professional Executors and Trustees: Discusses when professional trustees add value alongside family involvement, particularly relevant for Disabled Person's Trusts given their specialized requirements and potentially decades-long duration.
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Planning for a disabled family member's future requires specialist expertise. A properly structured Disabled Person's Trust protects benefits, minimizes tax, and provides lifelong financial security.
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Legal Disclaimer: This glossary entry provides general information about UK legal terminology and does not constitute legal advice. Disabled Person's Trusts are complex arrangements that must be properly structured to protect benefits and qualify for special tax treatment. Benefits rules change regularly. For advice specific to your family's circumstances, consult a solicitor specializing in special needs planning and disability trusts.