Disability U-turn – the impact on next generation planning

Posted by Alison Craggs on
Just five days after George Osborne announced his long term policy to "ensure disability benefits are better targeted", the Chancellor has been forced to make an untidy U-turn on Personal Independence Payments. The cuts, announced in two short sentences which went almost unheard, were given less air time than "sugar tax" and "tampon tax", but will impact many more children and adults.

Disability benefits can be hard to claim and can be easily lost. Individuals should consider their position carefully as to how wealth is managed between generations.

If you have a child who is disabled and leave assets to them outright under your Will, it could affect any means tested benefits they are receiving and result in their inheritance paying for care that would otherwise have been state funded. If you have done this in your Will or if you have not made a Will and the intestacy provisions apply, then you may wish to make your own U-turn now, before it is too late.

Rather than leaving assets outright to a disabled child under your Will, you can ring fence them in a trust to ensure the beneficiary's inheritance is protected and their means tested benefits not affected. Not only can these trusts avoid means testing, but they can also have inheritance tax (IHT), income tax and capital gains tax (CGT) advantages.

The IHT advantages are that the 10 yearly charges and exit charges that affect most other types of trust do not apply. Instead the trust is taxed as though the disabled beneficiary was entitled to the assets in the trust in his or her own right. When the beneficiary dies, any assets held in the trust on their behalf are treated as part of their estate, but depending on the value of their estate there may be no IHT to pay.

The income advantage is that an election can be made so that the income of the trust is taxed at the disabled person's own rate of tax, taking advantage of their personal allowance.

The CGT advantages are that an election can be made so that the beneficiary's CGT exemption (currently £11,100) can be used and gains are taxed at the individual's rate of tax, rather than the higher trustees' rate.

Whilst some people are wary of trusts, they are just a legal wrapper to hold assets and can offer many legitimate benefits, especially for disabled persons. If you would like further information please contact Alison Craggs or another member of the succession and tax team.

About the Author

Photograph of Alison Craggs

Alison advises clients on the best structure for their Wills and prepares powers of attorney and administers estates. 

Alison Craggs
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