Discretionary Trust vs Disabled Person’s Trust: The Tax and Benefits Difference

• A discretionary trust faces 10-year periodic charges of up to 6% and exit charges when capital leaves. A disabled person’s trust does not.
• Income in a discretionary trust is taxed at up to 45%. In a disabled person’s trust, it is taxed at your child’s personal rate, often nil.
• Only a properly drafted disabled person’s trust protects your child’s means-tested benefits, including Universal Credit and Housing Benefit.
• Your child must meet the qualifying conditions under Schedule 1A Finance Act 2005.
• Some families use both trust types together, splitting assets between a discretionary trust for wider family needs and a disabled person’s trust for the disabled beneficiary.

This is our preferred methodology.

A discretionary trust is the most flexible trust structure available in the UK. Your trustees decide which beneficiaries receive income or capital, how much, and when. No single beneficiary has an automatic right to anything.

That flexibility comes at a price. HMRC treats a discretionary trust as a “relevant property” settlement. The tax consequences are significant:

• Inheritance tax: up to 20% on entry if you transfer more than your available nil-rate band (325,000 GBP for the 2026 to 2027 tax year). Periodic charges of up to 6% every 10 years, plus exit charges when capital leaves.
• Income tax: 45% on non-dividend income, 39.35% on dividend income.
• Capital gains tax: 24% on residential property, 20% on other gains, with only half the standard annual exemption (1,500 GBP for 2025 to 2026).

For detailed guidance on how these charges work, see HMRC’s trusts and inheritance tax guidance.

A disabled person’s trust is a specific type of trust that meets the conditions set out in Section 89 of the Inheritance Tax Act 1984 (IHTA 1984). It must have one named disabled beneficiary, and the trust property can only be applied for that person’s benefit during their lifetime. For the full qualifying criteria, see HMRC’s guidance on trusts for vulnerable people..

Because HMRC treats your child as if they already own the trust assets, the punitive relevant property regime does not apply. That means:

• No 10-year periodic charges.
• No exit charges when trustees distribute capital.
• Income taxed at your child’s personal rate, not the trust rate. If your child has no other income, their personal allowance (12,570 GBP for 2026 to 2027) absorbs most or all of it.
• Capital gains taxed at your child’s rate, with the full annual exemption (3,000 GBP for 2025 to 2026) available.

Your trustees unlock this treatment by completing HMRC form VPE1 (Vulnerable Person Election), signed by both the trustees and the beneficiary (or their deputy or attorney).

Your child qualifies if they meet one of the conditions under Schedule 1A Finance Act 2005. The main routes are:

• Receiving, or eligible to receive, Personal Independence Payment (PIP) at the standard or enhanced rate.
• Receiving Disability Living Allowance (DLA) at the middle or higher care rate, or the higher mobility rate.
• Receiving Attendance Allowance, Constant Attendance Allowance, or Armed Forces Independence Payment.
• Unable to manage their own affairs because of a mental disorder within the meaning of the Mental Health Act 1983.

“Eligible” is the key word. Your child does not need to be actively claiming a benefit to qualify.

This is where the disabled person’s trust pulls furthest ahead. Because your child has no right to demand trust capital, the DWP and local authority do not count those assets when assessing Universal Credit, Employment and Support Allowance (ESA), Housing Benefit, or care contributions.

A standard discretionary trust can also protect benefits to some extent, because the beneficiary has no automatic entitlement. But there is a catch. If trustees make regular payments to your disabled child, the DWP may treat those payments as income. With a Section 89 trust, the legal framework is clearer and better tested.

If your child inherits assets outright, outside any trust, the capital counts immediately against the benefits threshold (currently 16,000 GBP for Universal Credit). Even a modest inheritance could end their benefits entirely.

The right answer is not always one or the other. Some families benefit from using both.

A disabled person’s trust is the right choice when your primary concern is providing for a specific disabled family member while protecting their benefits and keeping the tax position clean. It works best when the disabled beneficiary is the main intended recipient of the trust fund.

A discretionary trust makes sense when you want to provide for a wider group of beneficiaries, your disabled child included, and your trustees need the flexibility to respond to changing family circumstances. The trade-off is higher tax and less certainty on benefits protection.

19 out of 20 Bluebond clients legitimately pay zero inheritance tax. The families who achieve that result almost always start with the question, “What does my family actually need?”, not “How do I pay less tax?”.

For a deeper look at how disabled trusts work and what benefits they protect, see How disabled trusts work and the key benefits.

• Using a generic discretionary trust template for a disabled beneficiary. It will not qualify for Section 89 treatment, and your family will face 10-year charges they never expected.
• Leaving assets directly to your disabled child. Even a modest inheritance above 16,000 GBP could disqualify them from Universal Credit overnight.
• Assuming a disabled person’s trust works for everyone in the family. It is restricted to one named beneficiary. If you also need to provide for a spouse or other children, you need a separate structure.
• Forgetting the VPE1 election. Without filing HMRC form VPE1, your trustees cannot access the preferential income tax and CGT treatment, even if the trust qualifies under Section 89.
• Not planning for what happens after your child’s death. Trust assets form part of your child’s estate on death. The trust deed needs clear succession provisions for the remaining funds.

The difference between a discretionary trust and a disabled person’s trust is not just technical. It affects how much tax your family pays, whether your child keeps their benefits, and how much control your trustees have. Getting the structure right at the start avoids expensive corrections later.

It is essential to get experienced advice who understands the legal tax and financial planning issues your trustees will face. Comprehensive integrated advice is essential.

Bluebond’s free inheritance tax webinar covers the real planning choices families face, including trust structures for disabled dependants. For a personalised review, the Inheritance Tax Mitigation Plan is available for a transparent fixed fee.