Vulnerable Beneficiary Trusts (VBT)

Main characteristics of a VBT

The trust must meet several criteria imposed by HM Revenue & Customs (HMRC) to qualify as a VBT.

First, the primary beneficiary must be a 'vulnerable person'. To qualify, the beneficiary must either be:

• Someone who is under the age of 18 and at least one of their parents has died; or

• Be a 'disabled person', who, for tax purposes, is defined as someone who is not capable of administering their own financial affairs and/or someone who is eligible to receive welfare benefits, such as Disability Living Allowance (DLA); Personal Independence Payment (PIP); and/or Attendance Allowance.

Second, the VBT must be structured so that the trustees will be obliged to apply the trust income and capital for the principal benefit of the vulnerable beneficiary. The amount that can be distributed to any other beneficiaries is capped. (Currently, the amount is the lower of £3,000 or 3% of the maximum value of the trust fund in each tax year).

Thirdly, the trustees must have full control over the trust assets. This means that the trustees must decide how any funds are invested and when and how trust funds should be used for the benefit, care and wellbeing of the vulnerable beneficiary.

Tax benefits of a VBT

Trusts are usually subject to the 'relevant property regime' for inheritance tax. This means that there is a charge to inheritance tax on every 10 year anniversary of the trust on the value of the trust assets that exceeds £325,000. There are also exit charges when assets are transferred out of the trust.

A VBT will not be subject to inheritance tax charges during the lifetime of the primary beneficiary, which means that there will not be any 10 year anniversary charges or exit charges. Instead, on the death of the primary beneficiary, the value of the assets within the trust will be aggregated with the estate of the primary beneficiary and will be subject to inheritance tax on their death.

Provided that the trustees and the principal beneficiary make a joint election to the Revenue, a VBT can also benefit from favourable income tax and capital gains tax treatment. Trust income and gains will usually be subject to income tax/capital gains tax at the trust rates. However, if a valid election is made, the amount of tax that is payable will not be more than it would have been if the income had been received and/or gains had been achieved by the primary beneficiary direct.

Creation of a VBT

It is possible to include provisions within your Will for a VBT to be created on your death. For example, if you intend to leave the whole of your estate in equal shares to your three children, and if one of your children meets the criteria of a 'vulnerable beneficiary', you could include provisions in your Will for a VBT to be created on your death so that their share of your estate will fall into the newly created trust.

It is also possible to create a VBT in your lifetime.

Conclusion

A VBT can be a useful tool to ensure the financial security of a vulnerable beneficiary. Whether established during a settlor’s lifetime or through their Will, a VBT offers flexibility, peace of mind and significant tax advantages.

For further guidance or to explore setting up a VBT, please contact William Hollins.