Trusts that qualify as a Vulnerable beneficiary trust (VBT) receive special tax advantages.

To qualify the assets in the trust must only be used to benefit a beneficiary who is living with a mental or physical disability.

The vulnerable beneficiary must be entitled to all the income generated or, if they are not, none of the income can be paid to anyone else.

If there are other beneficiaries who are not vulnerable, the property that is there for the vulnerable beneficiary must be identified, kept separate and used only for the vulnerable beneficiary. Only that part of the trust gets special tax treatment.

To claim the special tax treatment, trustees must make an election to HMRC.

Election to HMRC

The election applies to both Income Tax and Capital Gains Tax – you can’t claim the treatment for only one tax.

The election takes effect from the date on the form and it must be made no later than 12 months after 31 January following the tax year when you want the election to start. Any income or gains before the date the election takes effect are taxed under normal trust rules – even if the election takes effect part way through the same tax year.

With this special tax treatment, VBT’s are an invaluable tool.

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