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Trust Law/Level IV · Trusts that care/4.1 Disability/Lesson 7

Government benefit trusts beyond the US

How the UK and Australia treat trusts for disabled people, and why each country’s rules must be checked on their own terms.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. UK: a discretionary trust in a will keeps capital generally outside the beneficiary’s means test. Universal Credit is unaffected below £6,000 and unavailable above £16,000; payments out may still count, and deprivation-of-capital rules apply to the person’s own money.
  2. UK vulnerable person election (form VPE1, signed by trustees and beneficiary) taxes trust income and gains as if the beneficiary’s own; disabled persons’ trusts get a £3,000 CGT annual exempt amount for 2025-26, versus £1,500. Trustees must tell HMRC when eligibility ends.
  3. UK inheritance tax: a trust for a disabled person avoids some charges on other trusts if, for trusts made on or after 8 April 2013, all payments benefit that person except up to £3,000 a year or 3% if lower.
  4. UK personal injury compensation is ignored for Universal Credit for 12 months, and thereafter only if held in trust or used to buy an annuity, so a simple personal injury trust protects it indefinitely.
  5. Australia: a special disability trust under Part 3.18A of the Social Security Act 1991 exempts up to $862,750 from the assets test (indexed each 1 July), and eligible family can gift $500,000 combined; use the free DSS model deed and meet annual reporting.

MaterialsA copy of any existing will or trust deed in your family, if there is oneYour country’s official guidance on trusts for disabled people (for example GOV.UK in the UK or Services Australia)A list of assets held in the disabled relative’s own name

Wonder

  1. What happens to my child’s means-tested benefits in the UK if I leave them an inheritance outright?
  2. What does the vulnerable person election change for a trust’s income tax in the UK?
  3. How do Australian rules differ from English ones for trusts benefiting people with disabilities?

Explore

  1. In the UK, the Finance Act 2005 created special income tax and capital gains tax treatment for trusts with a ‘vulnerable beneficiary’: a disabled person who meets set conditions, for example receiving certain disability benefits such as Personal Independence Payment, or a child under 18 whose parent has died. The trustees and the beneficiary must both sign a vulnerable person election (HMRC form VPE1). The trustees can then pay roughly the tax the beneficiary would have paid if the income or gains were theirs, using the beneficiary’s own allowances and rates. It is a tax election only.
  2. Means-tested benefits in the UK, such as Universal Credit, are a separate question from tax. A discretionary trust is often used because the beneficiary has no fixed right to income or capital; capital in such a trust is generally not treated as the beneficiary’s own. Payments the trustees make to or for the beneficiary may still be taken into account. And a person who gives away their own money to qualify for benefits can be treated as still having it under ‘deprivation of capital’ rules. Details differ between benefits, so the DWP or a benefits adviser can confirm.
  3. UK inheritance tax has its own rules for ‘trusts for disabled persons’. GOV.UK explains that such a trust can avoid some of the charges that apply to other trusts if payments go mainly to the disabled person. For trusts set up on or after 8 April 2013, all payments must benefit the disabled person, except up to £3,000 a year, or 3% of the assets if lower, which can be used for someone else. HMRC guidance sets out who counts as disabled for this purpose and how the trust is taxed.
  4. In Australia, special disability trusts are governed by Part 3.18A of the Social Security Act 1991. They are for a person with a severe disability, the principal beneficiary, and their main purpose must be the person’s reasonable care and accommodation needs. The deed must contain the clauses required by a government determination, and the Department of Social Services publishes a model trust deed. A trust can be set up during life or by will. There are annual reporting duties, and a trust that stops complying can lose its concessions.
  5. Services Australia describes two main concessions. Assets in the trust, up to an indexed limit, are exempt from the principal beneficiary’s social security assets test, and the home the beneficiary lives in can be held by the trust as well. Immediate family members who receive or qualify for certain pensions, such as parents, can together give up to $500,000 to the trust without the usual gifting rules applying to them. The limits and the amount the trust can spend on other purposes change, so families check the current figures.
  6. The general lesson is that each country has its own rules, set by national law and administered by its own agencies, and they change. A trust that works in one country may not work in another, and terms from US special needs trusts do not transfer automatically. Within the UK, Scotland and Northern Ireland have some separate benefits and laws. Official guidance, such as GOV.UK or Services Australia, is a starting point, and many families also consult a local specialist before setting up a trust.

Key facts

  • In the UK, the Finance Act 2005 created the vulnerable person election, which lets trustees be taxed on income and gains roughly as the vulnerable beneficiary would be.
  • The trustees and the beneficiary must both sign the election (HMRC form VPE1); it is a tax election and does not decide benefit entitlement.
  • Capital in a UK discretionary trust is generally not treated as the beneficiary’s own for means-tested benefits, but payments from it and deprivation-of-capital rules can matter.
  • In Australia, special disability trusts are governed by Part 3.18A of the Social Security Act 1991 and must meet set deed, purpose and reporting rules.
  • Australian special disability trust assets up to an indexed limit are exempt from the beneficiary’s assets test, and eligible family members can together gift up to $500,000 under a concession.
  • Rules for these trusts are national, differ between countries and change, so current official guidance in each country matters.

Exercise nine, six, three, one

9CollectList up to 9 assets or income sources that are, or might one day be, in your disabled relative’s name (some families have fewer), such as savings, an inheritance share, property or a compensation payment.
6ClusterSort them into 6 categories: cash and savings, property, inheritances, compensation payments, regular income, and other or unsure.
3DistillReduce the 6 categories to 3 groups: items that may affect means-tested benefits, items that may affect tax, and items to ask an official agency or a specialist about.
1CrystallizeWrite 1 sentence naming which country’s rules would apply to your relative and the official source you would check first.

Fact check

Dates, figures and claims checked against the published sources listed below.

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