A trust that meets the disabled person’s interest rules is treated for inheritance tax as if the disabled beneficiary owned the trust property. The fund is added to their estate when they die, there are no ten year or exit charges, and a lifetime gift into a qualifying trust for someone else is a potentially exempt transfer rather than an immediately chargeable one. The conditions are strict: the person must meet the statutory definition of disabled when the property is settled, and the trust must stop capital or income going to anyone else beyond small permitted amounts.

Who counts as a disabled person?

Section 89(4A) of the Inheritance Tax Act 1984 adopts the definition in Schedule 1A to the Finance Act 2005. Paragraph 1 lists a person who:

  • by reason of mental disorder within the Mental Health Act 1983 cannot administer their property or manage their affairs;
  • receives attendance allowance, or disability assistance for older people under the Scottish system;
  • receives disability living allowance with the care component at the highest or middle rate or the mobility component at the higher rate, or the Scottish equivalents for children and adults;
  • receives personal independence payment, or disability assistance for working age people with the daily living component at the standard or enhanced rate or the mobility component;
  • receives an increased disablement pension, constant attendance allowance or armed forces independence payment.

Paragraph 2 extends this to someone who would get attendance allowance but for residence and presence conditions or certain hospital and accommodation rules, provided they satisfy HMRC. Section 89(4) tests the position when the property was transferred into settlement, and HMRC’s manual at IHTM42805 confirms the treatment continues even if the disability later ceases.

What are the four kinds of disabled person’s interest?

Section 89B(1) defines four cases:

  1. Section 89 trusts (89B(1)(a)). Property settled after 9 March 1981 on trusts with no interest in possession during the disabled person’s life, which secure that any property or income applied in their lifetime is applied for them. Section 89(2) deems the disabled person to have an interest in possession.
  2. Self settlement in anticipation (89B(1)(b)). Under section 89A, a person who satisfies HMRC that they have a condition reasonably expected to make them disabled settles their own property on similar discretionary style trusts on or after 22 March 2006. Any power to end the trusts in their lifetime must leave someone absolutely entitled or a disabled person’s interest in place.
  3. An actual life interest for a disabled person (89B(1)(c)), arising on or after 22 March 2006, where the trusts secure that any property applied in their lifetime is applied for them.
  4. An actual life interest for a self settlor with an expected condition (89B(1)(d)), on similar terms.

Older trusts settled before 10 March 1981 fall under section 74 instead. IHTM42805 explains that they are not treated as an interest in possession, and a flat rate charge applies when property leaves them other than for the disabled person.

How strict is the rule on benefiting other people?

The Finance Act 2013 rewrote the test. For property transferred into settlement on or after 8 April 2013, Schedule 44 paragraph 9 to that Act brings in the current wording. Section 89(1)(b) now requires that any property or income applied during the disabled person’s life is applied for their benefit. Section 89(3) then allows two exceptions:

  • powers letting the trustees apply amounts to others up to the annual limit, which section 89(3A) sets at the lower of £3,000 and 3% of the maximum value of the settled property in the period, applied to each 12 months beginning on 6 April; and
  • the statutory power of advancement in section 32 of the Trustee Act 1925, or the Northern Ireland equivalent, including a version wider than the standard limit.

IHTM42805 explains that the 2013 changes removed the earlier requirement that at least half of any settled property applied in the disabled person’s lifetime be applied for them, but do not affect additions to trusts set up before 8 April 2013. A trust deed drafted before that date therefore has to be read against the older test.

How is the trust treated for inheritance tax over its life?

  • Funding by someone else. Section 3A(1A)(c)(ii) and 3A(3A) make a gift into a section 89 trust a potentially exempt transfer. IHTM42805 says the same applies to a gift creating an actual interest under 89B(1)(c). HMRC’s guidance says no tax is due immediately, but tax may be due if the donor dies within seven years.
  • Self settlement. IHTM42805 says transfers into 89B(1)(b) and (d) trusts are not chargeable occasions, because the property is treated as staying in the settlor’s estate.
  • While the trust runs. Section 59 treats a disabled person’s interest as a qualifying interest in possession, so the property is not relevant property. HMRC’s guidance says there is no ten year or exit charge while the asset stays in the trust as the beneficiary’s interest.
  • On death. Section 49(1) treats the beneficiary as owning the fund, so it is aggregated with their own estate and taxed at 40% above any available nil rate band.
  • Ending in lifetime. Section 52(2A)(b) applies the termination charge to a disabled person’s interest.

For comparison with a discretionary trust for the same family, see what relevant property means for trusts.

What about income tax and capital gains tax?

The inheritance tax rules stand alone. Income tax and capital gains tax relief needs a separate vulnerable person election made by the trustees and the beneficiary, explained in vulnerable beneficiary trusts. HMRC’s guidance on trusts and Capital Gains Tax gives trustees an annual exempt amount of £3,000 for 2026 to 2027 where the beneficiary is a disabled person, against £1,500 for most trusts.

When the disabled beneficiary dies, section 72(6) of the Taxation of Chargeable Gains Act 1992 treats a disabled person’s interest under 89B(1)(a) or (b) as an interest in possession, so the trustees get the tax free market value uplift under section 72.

How might this work for one family?

Illustration only. Ruth gives £200,000 to a new section 89 trust for her adult son Tom, who receives personal independence payment. The deed lets the trustees pay Tom’s sister up to the annual limit each year.

  • The gift is a potentially exempt transfer. If Ruth survives seven years, it falls out of account.
  • With the fund never above £200,000, 3% is £6,000, so the annual limit is the lower figure of £3,000. The power must be capped in that way; a wider power to benefit her would take the trust outside section 89.
  • No ten year charge arises. When Tom dies, the fund is added to his own estate, which can use his nil rate band.

What mistakes come up most often?

  • Assuming the vulnerable person election also fixes inheritance tax. It does not; the deed has to meet section 89 or 89B.
  • Giving trustees a general power to benefit other family members. Anything beyond the annual limit or a section 32 type power breaks the conditions.
  • Not keeping evidence of the qualifying benefit or condition at the date of settlement, which is when section 89(4) tests disability. For self settlements HMRC expects evidence of the condition at that time.
  • Forgetting the fund is in the disabled person’s estate on death, especially where their own will or intestacy needs planning. See the seven year rule for gifts for the donor’s side.
  • Adding money to a pre April 2013 trust and assuming the new, more flexible test applies to the whole fund.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.