Advice on trusts for a vulnerable person

[Mamma18283]

I am hoping someone can also explain the gov website to me.

www.gov.uk/guidance/trusts-and-inheritance-tax

Inheritance Tax is charged up to a maximum of 6% on assets — such as money, land or buildings — transferred out of a trust. This is known as an ‘exit charge’ and it’s charged on all transfers of relevant property.

If my child has money in a discretionary trust fund and that money is moved to a vulnerable person trust fund, am I right in understanding that it will be subject to 6% inheritance tax in exit fees? So if £100,000 is transferred out it will be subject to £6,000 tax because the nil rate band does not apply, the whole amount transferred is taxed?

The exception is if the money is moved within the first three months of the original trust being set up.

Secondly does “setup” mean the trust document is signed, or when is registered with HMRC, or when the funds are moved into the trust account?

Thank you for any advice. I do plan to seek out paid advice but it’s taking longer to do so than I expected.

I am no longer practising so could well be out of date, but my understanding is as follows:

Where relevant property is transferred from one trust to another trust, the Inheritance Tax rules usually treat the transferred assets as still belonging to the original settlement for tax purposes, until the assets are appointed out of the Trust to an individual. This would mean that no IHT is due on a transfer between trusts or on a resettlement, but an exit charge would be applied if the funds were paid out to an individual. A transfer to a qualifying Disabled or Vulnerable Person's Trust would mean that the assets being transferred are no longer relevant property (ie. outside the 10 year charge) so they are treated similarly to transfers to an individual and the exit charge would apply.

The starting date of the settlement is defined as the time when property first became comprised in it (not the date of signature).

This is a complex area of trust tax law with multiple taxes impacted by such a transfer so I would definitely seek very good professional advice before proceeding so you are fully aware of the Income Tax and Capital Gains Tax consequences as well as Inheritance Tax.