Who Qualifies for a Disabled Persons Trust?

A disabled person qualifies for a Disabled Person’s Trust if they meet the legal test in Schedule 1A of the Finance Act 2005. This covers anyone incapable of managing their own affairs due to a mental disorder, or anyone receiving specific disability benefits, including Disability Living Allowance (the care component at the highest or middle rate, or the mobility component at the higher rate), Personal Independence Payment, Attendance Allowance, and several others. Meeting this test unlocks valuable inheritance tax, income tax, and capital gains tax reliefs.

If you’re planning for a disabled child, partner, or family member, understanding this test matters. Get it wrong, and the trust loses its special tax status. Get it right, and you protect both their financial future and their entitlement to means-tested benefits.

What Is a Disabled Persons Trust?

A Disabled Person’s Trust is a type of trust set up specifically for someone who meets HMRC’s legal definition of a disabled person. It’s sometimes called a “vulnerable beneficiary trust” or a “Section 89 trust,” after the section of the Inheritance Tax Act 1984 that governs it.

Unlike a standard trust, it can hold assets for a disabled beneficiary without those assets being treated as belonging to the beneficiary for means-tested benefits purposes. At the same time, it qualifies for special tax treatment that ordinary discretionary trusts don’t get.

The trust can be:

Discretionary trustees decide how and when income or capital is applied for the beneficiary
A trust with an interest in possession: the beneficiary has a right to trust income as it arises

Both structures can qualify, provided the underlying conditions are met.

Who Qualifies for a Disabled Persons Trust?

The legal test comes from Schedule 1A of the Finance Act 2005. A person is treated as “disabled” for trust purposes if they fall into one of these categories:

They’re incapable, by reason of mental disorder within the meaning of the Mental Health Act 1983, of administering their own property or managing their own affairs
They receive Disability Living Allowance, by virtue of entitlement to the care component at the highest or middle rate, or the mobility component at the higher rate
They receive Personal Independence Payment
They receive Attendance Allowance
They receive Constant Attendance Allowance
They receive Armed Forces Independence Payment
They receive an increased disablement pension
They would satisfy one of these benefit conditions but for not having reached qualifying age, or because their claim has not yet been decided

Important nuance: it’s entitlement to the relevant benefit that matters, not whether the person is actually claiming it. Someone who is eligible but hasn’t applied can still qualify, though in practice trustees usually want evidence of the underlying condition, not just a benefit award, to satisfy HMRC.

Since April 2013, the definition of “disabled person” for these trusts was aligned with the Welfare Reform Act 2012, reflecting the introduction of PIP alongside DLA. The Finance Act 2013 also removed the old requirement that at least half of the settled property acquired during the disabled person’s life had to be applied for their benefit, specifically a change that gave trustees more flexibility in how income and capital are used.

It’s also possible for someone to set up this type of trust for themselves, using their own assets, if they have a condition that’s expected to lead to them becoming disabled. This is a rare exception to the usual rule that self-settled trusts don’t get favourable tax treatment.

Why Does It Matter Which Type of Trust You Use?

The tax treatment varies significantly depending on whether a trust qualifies under Section 89, and this is where families most often go wrong.

Inheritance tax:

Gifts into a qualifying disabled person’s trust are treated as Potentially Exempt Transfers (PETs), not chargeable lifetime transfers
The trust isn’t subject to the 10-yearly periodic charges or exit charges that apply to ordinary discretionary trusts
On the beneficiary’s death, trust assets are treated as part of their estate, so their own nil-rate band (currently £325,000) and, where applicable, residence nil-rate band (up to £175,000) apply in the normal way

Income tax and capital gains tax:

Disabled person’s trusts get the full CGT annual exempt amount, rather than the reduced amount that applies to most other trusts
Trustees can make a vulnerable person election to HMRC, using form VPE1, so that income and capital gains are taxed broadly as if they belonged to the beneficiary directly, rather than at trust rates
This election must be made within 12 months of the 31 January following the tax year it’s meant to start in, and it’s a one-off, irrevocable election that ends only if the beneficiary dies, stops being vulnerable, or the trust winds up

Without the vulnerable person election, none of this preferential income tax or CGT treatment applies automatically; trustees have to actively claim it.

What Happens If the Trust Doesn’t Meet the Conditions?

If a trust is drafted incorrectly, or the beneficiary doesn’t meet the Schedule 1A test, HMRC will treat it as an ordinary discretionary trust. That means:

Ten-yearly periodic charges of up to 6% on the value above the nil-rate band
Exit charges when capital leaves the trust
Income taxed at the trust rate (currently up to 45%), not the beneficiary’s own rate
No entitlement to make a vulnerable person election

This is a common and costly mistake using a generic discretionary trust template for a beneficiary who was meant to have a disabled person’s trust, without checking the drafting actually satisfies Section 89.

What Should You Check Before Setting Up a Trust?

Before a trust is set up, it’s worth working through these questions with a specialist:

Does the intended beneficiary meet the Schedule 1A Finance Act 2005 test either through mental incapacity or entitlement to a qualifying disability benefit?
Is the trust drafted to satisfy Section 89 IHTA 1984, rather than defaulting to a standard discretionary trust?
Will the trust be created during your lifetime, by will, or both?
Who will act as trustees, and is there a succession plan in place for when they’re no longer able to serve?
Will trustees remember to file the vulnerable person election, and keep on top of ongoing HMRC and Trust Registration Service compliance?
Does the trust deed address what happens to remaining funds after the beneficiary’s death?

A disabled person’s trust is restricted to one named beneficiary. If you also need to provide for a spouse, other children, or wider family, you’ll likely need a separate structure alongside it.

What’s the Bottom Line on Disabled Persons Trusts?

Qualification depends on the Schedule 1A Finance Act 2005 test of mental incapacity or entitlement to specific disability benefits, including DLA, PIP, and Attendance Allowance
It’s entitlement to a benefit that counts, not just active receipt of it
A qualifying trust avoids the periodic and exit charges that apply to ordinary discretionary trusts
Full CGT exemption and the vulnerable person election (form VPE1) can bring income and gains down to the beneficiary’s own tax rates
Poor drafting is the most common reason families lose these reliefs; the trust deed has to be built around Section 89 from the outset

Get Specialist Advice on Your Disabled Persons Trust

Setting up a trust for someone you love shouldn’t feel overwhelming, and getting the detail right matters more here than in almost any other area of estate planning. At Paradigm Wills, we take the time to understand your family’s circumstances and make sure any trust is drafted to genuinely protect both your loved one’s finances and their entitlement to benefits.

Whether you’re based in Leicester, London, Birmingham, or anywhere in between, our friendly, no-obligation consultations are designed to put you at ease from the very first conversation.

Call our Leicester office on 0116 464 7055 or our London office on 0208 194 7189 to talk through your options. This article is for general information only and does not constitute legal or tax advice. Trust and tax rules can change, and individual circumstances vary; please speak to a qualified adviser before acting on anything above.