What is a Disabled Persons Trust?

A DPT is a type of trust where the principal beneficiary is a 'disabled person'.  DPTs benefit from a favourable tax regime for income tax, capital gains tax and inheritance tax making it an attractive way to provide financial provision in a protective structure for a family member who qualifies as a 'disabled person'. A gift into a DPT is not a chargeable transfer and therefore will cease to be relevant for the donor's personal inheritance tax position after 7 years.

The Finance Act 2005 sets out what a 'disabled person' means for the purposes of a DPT.  It includes someone in receipt of certain benefits – for example Personal Independence Payment or Disability Living Allowance– or having reduced mental capacity such that the person cannot deal with their property and financial affairs. 

A DPT is limited in that although capital or income does not have to be made available to the disabled person, funds can only be used for the benefit of the disabled person during their lifetime and not for any other beneficiary (other than a modest allowance of the lower of 3% of the trust fund and £3,000 a year).  It is therefore important to consider carefully the level of funds to put into a DPT, because once it is in trust you cannot redirect it to other beneficiaries during the disabled person's lifetime or appoint it back to the donor(s).  Once the disabled person has died, the DPT can continue as a trust for other beneficiaries but the DPT tax benefits outlined above will no longer be available.

Trustees of a DPT have to be mindful of exercising their powers in an appropriate way that will not impact the disabled person's s means tested state benefits.

The trustees of a DPT will need to submit an annual income tax and capital gains tax return to HMRC each year and annual account for the trust will need to be prepared. Specialist advice is likely to be needed in relation to accounting and tax compliance.

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