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HMRC internal manual

Capital Gains Manual

2006 IHT changes: IHT treatment from 22 March 2006: trusts for the disabled

Under IHTA84/S89 and IHTA84/S89A, see IHTM42805 there is special treatment for a trust fora mentally or severely physically disabled person without an interest in possession whichmeets certain income and capital conditions, which are different from those in FA05/S34,which is concerned with the ‘vulnerable beneficiary regime, (TSEM3440) orTCGA92/Sch1/Para1 (CG18050) which gives a greater annual exemption. The disabledbeneficiary is deemed to have an IIP.

IHTA/S89A extends this to cases where a person ‘A’ transfers property to asettlement for his own benefit and satisfies HMRC that he has a condition likely to leadto serious disability. However broadly speaking the trusts must ensure that during hislifetime A is the only beneficiary able to receive benefits from the trust; hence theconditions are narrower than those of S89.

IHTA84/S89(5) and (6) extended the definition of disabled person with regarded to propertyprovided after 22 March 2006 to persons who would be entitled to the statutory allowancesbut for being in certain accommodation or being not resident in the UK.

Accordingly the first three bullets of CG36542 are in point. One should note that for S89and S89A the test is the condition of the disabled person when the property is settled.

IHTA84/S89B defines ‘disabled person’s interest’ as including not merelythe deemed IIP in S89 and S89A, but also where a severely disabled person becomesbeneficially entitled to an actual IIP on or after 22 March 2006. It is also considered toextend to actual IIP where the trust would meet the tests but for the existence of theIIP. So the first three bullets of CG36542 are in point. Because these are cases of actualIIPs he death uplift for CGT mentioned in the fourth bullet also applies.