Every parent wants to know their child will be supported long into the future. For families with children who have Special Educational Needs and Disabilities, that sense of responsibility can feel even greater. Financial planning becomes more than simply building wealth, it becomes a way to safeguard care, independence and quality of life.
Here in England around 17.3 per cent of children are recognised as having SEND, equating to approximately 1.5 million children. When you consider their parents, siblings and grandparents this is a subject influencing millions of households across the country. It is also an area where the right planning can make a remarkable difference to the future confidence and security of a child.
More than half a million of these young people have an Education, Health and Care Plan (EHCP), a vital tool ensuring that the right level of support is in place for learning and personal development. It is important that financial arrangements work effectively alongside these care structures. That often requires a collaborative effort involving carers, legal professionals, medical specialists and financial planners like me.
Why a Vulnerable Beneficiary Trust can make a difference
Families often save diligently for their child’s future through products such as Junior ISAs or Child Trust Funds. However, a common difficulty arises if at age 18 that child does not have the mental capacity to manage those funds. Accessing money may then become far from straightforward.
A Vulnerable Beneficiary Trust, often referred to as a Disabled Persons Trust, is designed to overcome this problem. The assets are owned and controlled by appointed Trustees who ensure that any expenditure is always in the beneficiary’s best interests. The child retains the benefit of the funds, without being burdened with legal or financial responsibility.
Tax advantages of a Vulnerable Beneficiary Trust
There are significant tax advantages to using a Vulnerable Beneficiary Trust, provided certain conditions are met:
Inheritance Tax Benefits
For trusts created after 6th April 2013, gifts into a discretionary Vulnerable Beneficiary Trust are treated as Potentially Exempt Transfers (PETs) rather than Chargeable Lifetime Transfers (CLTs). Both types of gift fall outside of the donor’s estate for inheritance tax purposes, provided they survive seven years. But importantly, PETs are not assessed against the donor’s remaining nil rate band for a potential lifetime IHT charge of 20%. They also avoid being subject to the periodic and exit charges that apply to most discretionary trusts.
To qualify for these IHT benefits, all payments must go to the disabled person, except for up to £3,000 per year (or 3% of the trust assets, if lower) which can be used for someone else’s benefit.
Income Tax and Capital Gains Tax
Vulnerable Beneficiary Trusts benefit from a full Capital Gains Tax annual exemption (currently £3,000) rather than the reduced exemption that applies to most trusts. Additionally, on the death of the vulnerable beneficiary, there is no CGT payable and the trustees’ acquisition costs are uplifted to market value at date of death, effectively wiping out any gains.
The trustees can make a ‘vulnerable person election’ to HMRC, which allows income and capital gains to be taxed as if they belonged directly to the beneficiary. This means the trust can benefit from the vulnerable beneficiary’s personal allowances and lower tax rates, rather than paying tax at the higher trust rates.
This election must be made within 12 months of the 31st January following the tax year when it is to start. It is irrevocable but ceases on the death of the vulnerable beneficiary, the trust being wound up, or the beneficiary ceasing to be vulnerable.
Investment Bond Considerations
If the trust holds investment bonds, the tax treatment differs. During the settlor’s lifetime and in the tax year of their death, any chargeable gain is assessed on the settlor rather than the trustees. This means no vulnerable person election can be made during this period. After the settlor’s death, the trustees become liable to tax on gains at the trustee rate but can then make a vulnerable person election to reduce the tax liability.
Additional considerations
Trustees can tailor an investment approach to suit the beneficiary’s needs and other beneficiaries can be included, provided the vulnerable child remains the primary beneficiary and the conditions for tax relief are met.
It’s important to note that payments from the trust could affect means-tested state benefits. Trustees may consider purchasing items for the disabled beneficiary directly from the trust to avoid impacting benefit entitlement.
How do you set one up?
Setting up a Vulnerable Beneficiary Trust can be done either during your lifetime or through your Will. Because no two families are the same, I always recommend seeking specialist legal advice to ensure the structure is right and wording is watertight.
Where needed, I can support you with trusted legal introductions, and together we can build a plan that provides clarity, confidence and security for the future.
I genuinely believe that thoughtful planning helps families focus on what matters most, giving their children the best possible chance to thrive. A Vulnerable Beneficiary Trust is simply one tool in making that happen, but it can offer enormous peace of mind.
If you would like help planning for a SEND child or vulnerable person in your life, please get in touch. I would be pleased to talk through the options in a relaxed, no-obligation conversation.
Joseph Cooper FPFS MCIS
Chartered Financial Planner
Paladin Financial Planning
The information and guidance provided within this article is subject to the UK regulatory regime and is therefore primarily targeted at consumers based in the UK. This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
Paladin Financial Planning is a trading style of Saltus Partnership Limited, which is authorised and regulated by the Financial Conduct Authority. FCA reference number: 554381. Registered office: Solent Business Park, 4500 Parkway, Whiteley, Fareham PO15 7AZ. Registered number: 07586042 Registered in England and Wales.
By Joseph Cooper FPFS
