What is the difference between a Personal Injury Trust and a Disabled Person's Trust?

By Holly Miéville-Hawkins, Partner at Anthony Gold Solicitors

When a person has disabilities or injuries, it is often the case that all or part of their funds are held in a form of Trust. However, there can be confusion about what form of Trust may be most suitable. This article explores the similarities and differences between the two main forms of Trust for disabled or injured beneficiaries.

 

Trusts for disabled persons

The Inheritance Tax Act 1984 (IHTA 1984) established a special form of Trust, known as a Disabled Person’s Trust, or s.89 Trust, allowing assets to be held in a tax-efficient and means assessment-efficient manner for the benefit of a disabled person.

 

Which beneficiaries qualify?

To qualify for a s.89 Trust, the primary beneficiary must meet the definition of ‘disabled’ under s.216 of the Finance Act 2013, meaning that they either:

• Are incapable, due to mental disorder (within the meaning of the Mental Health Act 1983), of administering their own property or managing their own affairs, or;
• Are in receipt of or qualify for Attendance Allowance (under S64 of the Social Security Contributions & Benefits Act 1992), or;
• Are in receipt of or qualify for higher or middle rate Disability Living Allowance for Care, or;
• Are in receipt of or qualify for Personal Independence Payments.

It is important to note that the person doesn’t actually have to be in receipt of the benefit, ie, the person can be in hospital and not actually receiving the benefit, provided that they qualify for it. The key date for qualification is the date that funds were placed into the Trust. The beneficiary can cease to be a disabled person during the lifetime of the Trust, and it will not affect the definition of the Trust for Inheritance Tax (IHT) and Capital Gains Tax (CGT) purposes. There do need to be potential other beneficiaries in addition to the disabled person, either during their lifetime if it is a Discretionary Trust, or after their death if it is an Interest in Possession (IIP) Trust, as explored below.

The Trustees tend to be the settlor, alongside one to three trusted friends or Advisers. It is possible for the disabled person to be a Trustee if they have sufficient mental capacity to take on this role.

 

Which types of Trusts can be created by whom?

There are two types of Trust that can be created by someone other than the disabled person:

S.89B(1)(a) - Discretionary Trust settled by someone other than the disabled person.

Conditions:

1. There must be no Interest in Possession (IIP) by the disabled person. However, for tax purposes, it is treated as if there is an IIP.
2. There can be other beneficiaries to the Trust other than the disabled person, but see ‘c' below regarding risks associated with this.
3. A maximum of 3% of the fund, or £3000, whichever is lower, can be settled for the benefit of someone other than the disabled person.

 

S.89B(1)(c) - An Interest In Possession Trust (IIP) to which a disabled person is beneficially entitled.

Conditions:

1. There is an actual IIP in favour of the disabled person.
2. There cannot be any lifetime beneficiaries other than the disabled person.

The tax treatment of such Trusts is very important, and is summarised below.

 

Inheritance Tax

• Creation of the Trust is a Potentially Exempt Transfer (PET) for the Settlor.
• No entry or ten-year charges apply.
• The Trust property is taxed as if it were the disabled person’s own on their death.
• Distributions out of the Trust to the disabled person in person are not taxable to the Trust, as there is no transfer of value.
• For Discretionary Trusts, payments to another beneficiary, or to another disabled person’s Trust during the disabled person’s lifetime are treated as PETs.

 

Income Tax

• Provided that the above rules are complied with, and a ‘Vulnerable Person’s Election’ is made annually at HMRC using form VPE1, the Trust will be taxed at the disabled person’s own personal rate of tax, with equivalent allowances, rather than the more punitive Trust rate of tax.

There are also Capital Gains Tax benefits to these types of Trust, which are beyond the scope of this article.

The legislation also permits people who have a condition that could reasonably be expected to lead to their becoming disabled to settle for themselves either a Discretionary Trust (s.89B(1)(b)) or a Life Interest Trust (s.89B(1)(d)). In that case, the creation of the Trusts is a nil event from an IHT perspective, and the wider tax treatment is broadly similar to s.89 Trusts that are settled by third parties.

 

Means assessment

The funds in a Discretionary Trust settled by someone other than the disabled person will be exempt for the purposes of means assessment, provided it is not distributed in a way that would impact the person’s benefits. By way of contrast, the income from an IIP Trust settled by someone other than the disabled person will be taken into account for the purposes of means assessment as a matter of course, but the capital will not. 

Any funds in a self-settled Trust will be available for the purposes of means assessment.

 

Personal Injury Trusts

Personal Injury Trusts operate under a different statutory regime to s.89 Trusts. A Personal Injury Trust (PIT) must be self-settled or settled with Court authority. There is no requirement for the Settlor to be classified as disabled either on settling or at a later date. However, the funds must exist as a result of a personal injury award. As a general rule, they are set up as bare Trusts, and this article proceeds on the basis that they are bare Trusts. It is possible to set up discretionary or IIP forms of PIT, but this could have adverse tax consequences unless the beneficiary is classified as a disabled person and can take advantage of the s.89 regime above, and specific advice is needed.

When a person is injured, there are many reasons that they may want to place their funds into a Trust; specifically, they may not want to have the responsibility of managing large sums of money, and may want to protect the funds from people who may want to access them. However, the primary reason people tend to place funds into a PIT is that funds held this way are exempt from means assessment. However, it is important to note that as a PIT tends to be a bare Trust, if the Settlor retains capacity to do so, they can bring the Trust to an end whenever they want to. The funds are also vulnerable in the event of bankruptcy, separation, or divorce. Additionally, it is essential that great care is taken to appoint Trustees who are able to act in line with their fiduciary duties and consider the beneficiary’s best interests when managing the funds and making decisions to distribute funds. It is possible for one Trustee to be the settlor, but there should also be at least one Trustee who is not the Settlor.

 

Tax treatment 

As the funds are held in a bare Trust, they are taxed as if they belong to the injured person. No additional paperwork is required. They also form part of the Settlor’s estate when they die, and follow their testamentary wishes.

 

Means assessment

Following receipt of a payment as a result of personal injury, this payment will be ignored for the purposes of means assessment for 52 weeks (paragraph 12 of Schedule 10 to the Income Support (General) Regulations 1987). After this period, the funds will only be ignored for the purposes of means-assessed benefits if they are in a Trust, or held by a Deputy (paragraph 44, Schedule 10, Income Support (General) Regulations 1987. 

Therefore, provided funds are placed in a Personal Injury Trust within 52 weeks of the receipt of any funds deriving from the injury, they will be exempt for the purposes of means assessment. It is important that a Personal Injury Trust is set up as soon as possible after any funds are received as a result of the injury, to prevent any mixing of non-Trust funds with personal injury funds.

Whilst the capital award will be exempt for the purposes of means assessment if the funds are placed in a Trust, income by way of periodical payment specifically earmarked for care may be able to be taken into account by the local authority.

 

Summary table

 

Conclusion

The type of Trust that best meets the needs of a disabled or injured person very much depends on the situation at hand and the type of assets within the Trust. However, with careful planning and attention to detail, both types of Trust can provide significant protection and reassurance for injured and disabled people, and their loved ones.

 

About the author

Holly, a Partner in the Court of Protection team at Anthony Gold Solicitors, has nearly 15 years’ experience in complex COP matters. Nationally recognised, she specialises in finance, property, and welfare issues for vulnerable individuals. A qualified STEP practitioner, speaker, and writer, she’s committed to preventing financial abuse and advancing best practices through training, publications, and professional leadership roles.

 

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Topics: Mental Capacity, Entitlement, Beneficiaries, Inheritance, Trusts, Trustees