The benefit and tax credit systems contain detailed provision for the treatment of income and capital including how assets held on trust can be treated.
A trust is a legal arrangement for owning a capital asset. This article outlines some common types of trust, the parties to a trust and the way trusts can be treated for benefit and tax credit purposes.
What do we mean by ‘income’ and ‘capital’? These terms can be used to describe the different parts of an asset. The ‘capital’ part is the asset itself and the ‘income’ is the amount that is earned from it. Take the simple example of a house which is rented out – the ‘capital’ value is the house itself and the ‘income’ is the rent paid to the landlord. A bank account can also be looked at in this way. The ‘capital’ is the amount deposited and the ‘income’ is the interest earned on it.
If you claim income support, income-related employment and support allowance, income-based jobseeker’s allowance, pension credit, housing benefit and council tax benefit both your income and capital will be taken into account when working out your entitlement.
Income includes earnings, benefits and pensions. Capital includes savings, stocks and shares, other investments, the value of property or land and can include borrowed money (although the latter may also be treated as income in some circumstances). The rules also include provision for specified income and capital which can be disregarded.
Having too much income or capital above the upper limit of £16,000 will exclude you from receiving income support, income-related employment and support allowance, income based jobseeker’s allowance, housing benefit or council tax benefit. There is also a lower capital limit of £6,000 and provided you have £6,000 or less this will not affect your benefit. If you move permanently into a care home the lower limit goes up to £10,000. There is no upper capital limit for those claiming pension credit but the lower limits mentioned above still apply.
If you have capital between the lower and upper limits the general rule is that you will be treated as having a ‘tariff income’ of £1 per week for every £250 (or part of £250) above the lower limit. However, if you or your partner are claiming pension credit or are aged 60 or over and not claiming income support or income based job seeker’s allowance, for every £500 (or part of £500) of capital above those amounts, you are treated as having £1 a week in income.
As tax credits are calculated on income not capital levels, there are no capital limits for child tax credit and working tax credit. However, the actual income you receive from savings and other capital can be taken into account. HM Revenue and Customs administers tax credits and the rules are largely based on income tax legislation with taxable income taken into account and most other income ignored.
Owning property is usually clear and straightforward. You have money in your bank account and it belongs to you. You own a house and the deed is in your name. You buy stocks and shares and your name is recorded as the owner.
Sometimes, things are not so clear-cut. The mere fact that an asset or an account at a bank is in someone’s name alone does not always mean that it belongs to that person. One person may be holding an asset on behalf of another. For example, you may have £30,000 in your name in a bank account. It is not your money. Your brother has asked you to hold the money for him following the sale of his property. You have an obligation to look after it and are, in effect, holding it in trust for him. This is usually called a ‘simple’ or ‘bare’ trust.
A trust can arise without anything being put down on paper but will normally be created by a formal deed, prepared by a solicitor or other professional adviser, setting out the terms. A trust can be created under the terms of a will, or occur when someone dies without leaving a will. Courts can also create a trust and this can happen when deciding how to deal with property for the benefit of a child or someone who cannot manage their own affairs.
For an express trust to exist, three conditions must be satisfied:
1. That there is the intention to create a trust.
2. That the trust asset is identified.
3. That those who will benefit from the trust are identified.
There are three main parties to a trust the settlor, the trustee and the beneficiary. The person or company who gives the asset is called the settlor (there may be more than one settlor). The legal owner of the trust asset is called the trustee and there is usually more than one trustee. They have the legal responsibility for looking after the asset of the trust. Anyone who benefits from the asset held in the trust is called a beneficiary. There may be one beneficiary or many beneficiaries. Sometimes the settlor, trustee and beneficiarycan even be the same person
When an asset is held under a trust it is effectively divided into two parts, the legal title held by the trustees and the beneficial interest owned by the beneficiary. Beneficial interest can include income or capital (or both) of the trust. A short description of some common types of trusts is set out below:
Bare trust – also known as a ‘simple trust’ where the trustee holds the asset for the beneficiary. Provided the beneficiary is aged 18 or more (or younger, if married or in a registered civil partnership), he or she has full control and can demand the asset or income from it at any time. The beneficiary effectively owns the asset, so its market value and any income derived from it will count for benefit assessment purposes. The income will be relevant for tax credit assessment purposes.
Contingent trust – a trust where ownership of interest depends on a future event such as marriage or reaching a specified age. A future interest in capital can have a market value and, for benefit assessment purposes, may be treated as actual capital or its value may be ignored, depending on the source.
Discretionary trust – a trust where the beneficiary does not have control of the asset. Any payment of capital or income is at the ‘discretion’ of the trustees (i.e. the trustees decide who is to benefit and by how much) and will depend on the wording of the trust deed or general trust law. Usually, a beneficiary cannot be treated as owning the asset if he or she cannot demand the asset itself (or payment of income or capital from the asset). Actual payments made to a beneficiary by the trustees may be treated as capital or income depending upon their nature and purpose.
If the trustee is the benefit claimant, the asset will not usually be considered as part of his or her capital.
How a beneficiary will be treated when assessing entitlement to benefits and tax credits will depend on many factors. The regulations provide that the capital value and/or income of some trusts are specifically disregarded.
Some income or capital will be fully taken into account or it may be partially disregarded. For example, when claiming benefits, the value of your home, if you live in it, is disregarded.
Where no specific disregard applies, the beneficiary of an asset under a trust may have the whole of the capital value of the asset and/or any income, such as interest, taken into account when assessing their entitlement to means-tested benefits. Any interest would be taken into account for tax credits. This can occur where the beneficiary has ‘beneficial ownership’ of the asset i.e. the absolute right to take possession of any of the money at any time such as when a ‘simple trust’ has been set up.
If, however, a beneficiary does not have ‘beneficial ownership’ he may not be able to treat the asset as his own e.g. when the trustee has ‘discretion’ about how to use the income or capital of the trust and the beneficiary cannot demand any payment, such as in a discretionary trust. In this case, the trust may be ignored when assessing entitlement to benefits and tax credits but actual income received by the beneficiary may be taken into account.
For those aged under 60 (or over 60 and claiming income support, income-related employment and support allowance or income-based jobseeker’s allowance), the regulations specifically disregard the value of a trust derived from a personal injury when deciding whether a claimant is entitled to income support . Similar provisions apply to income-based jobseeker’s allowance, housing benefit and council tax benefit. However, until the trust is set up, even if a solicitor holds the money, once it is possible to identify the claimant’s capital, it will be taken into account.
For those aged 60 or over, claiming pension credit, housing benefit or council tax benefit (but not if claiming income support or income-based jobseeker’s allowance), the rules relate to the claimant and their partner. Certain specified capital can be disregarded for the purpose of calculating income; this includes personal injury compensation payments. This applies whether a trust has been set up or not. If a trust has been set up with a personal injury payment, the value of the trust and any income from it is completely disregarded.
In all cases, where a trust relates to a personal injury payment made in respect of a partner who dies or is already deceased when the payment is made, the capital cannot be disregarded.
Where the Court of Protection administers a trust fund (e.g. for someone who cannot manage their own affairs) set up with money awarded in respect of personal injury or compensation for the death of a parent, in the case of minors under the age of 18, the fund is ignored. Payments from the fund will usually be treated as capital but can also be treated as income.
For income support, income-related employment and support allowance, housing benefit, council tax benefit, pension credit and tax credit assessment purposes, other trust funds are specifically disregarded in the regulations. These include any payment made under the Macfarlane Trusts, the Fund, the Eileen Trust, the Skipton Fund or the Independent Living Funds. Payment from a government funded trust for people with variant Creutzfeldt-Jakob disease paid to them or their partner, is disregarded for life and payments to a parent for a child are disregarded for 2 years or until the child reaches the age of 16 or 20 if in full-time education.
In the absence of a trust deed, it is not always clear when a trust arises. Over the years the courts have had to distinguish whether a trust or some other concept exists. In the case of Barclays Bank v Quistclose Investments Ltd [1968] 3 All ER 651 the House of Lords found that both a debt and a trust was involved in the same transaction. The case involves a company that declared a dividend but had no funds to pay shareholders. They borrowed money from Quistclose Investments Ltd made on the condition that it would only be used to meet the dividend due. The company went into liquidation. The House of Lords took the view that as the loan was only to be used for the purpose of paying the dividend, it could only mean that if the money was not used to pay the dividend it was to be returned to the lender. The way this could be done was via the creation of a trust. The vital element appears to be that the intention was that the money should be used for a prescribed purpose and no other.
In further cases (Westdeutsch Landesbank v Islington London Borough Council [1996] 2 All ER 961), Lord Millett emphasised that to create a trust, it was not necessary to have the intention to create a trust. The important thing was that the parties entered into an arrangement that has the effect of creating a trust.
In order to illustrate how benefit decisions are determined, it is useful to see what decisions the courts have made when questioning whether a trust has been created in deciding the extent of a claimant’s capital.
This case concerned a claimant who died and it was later discovered that he had two building society accounts which had not been disclosed to the Department. A decision was made that the money was a resource of the claimant and in consequence he had been overpaid benefit. The claimant’s son had transferred £2,850 into one of the accounts for him to use should he wish to go to India. The Commissioner held that the transaction could be viewed as creating a trust and as the claimant had not used the money to travel to India there was a resulting trust in favour of the son. Alternatively, the Commissioner stated that the transaction amounted to a loan, applying the Barclays Bank Ltd v Quistclose principle and the money should be returned to the son and went on to say that in either view the tribunal could not reasonably have concluded that the money was a resource of the deceased.
A claimant owned two houses apart from the accommodation he occupied and because of this it was decided that his capital resources exceeded the statutory limit and his claim for benefit was disallowed. The claimant maintained that he was holding the ownership of the first house as a nominee for his son, the real owner. The second house was said to have been transferred to another of the claimant’s sons. The Commissioner found that the in relation to the first house a resulting trust had arisen for the benefit of that son and in the second property there was a ‘presumption of advancement’ in favour of the other son and the question the tribunal should have then been asking was whether the claimant had deprived himself of the property in order to secure benefits. The appeal was allowed.
This case relates to the method of treating a claimant’s life interest in a trust fund when calculating his capital and income resources for benefits. The claimant was a beneficiary under her late mother’s will, which directed that the trustees invest £10,000 and pay the income derived from the investment to the claimant during her lifetime. The will gave the trustees absolute discretion to use any part of the invested capital for the maintenance and benefit of the claimant. The decision-maker found that trust was to be treated as the claimant’s capital and this was upheld by a tribunal. The claimant appealed to the Commissioner. The Tribunal of Commissioners observed that the appeal involved points of exceptional difficulty and complexity. They allowed the appeal but stated that without a practical experience of trust law and equity practice the provisions set out in the decision would not clarify matters for decision makers in future cases.
The claimant, his wife and his disabled adult son lived in a council house. The claimant’s mother-in-law provided money to purchase the leasehold of a holiday camp chalet. The leasehold was taken in the sole name of the claimant. The family spent their summer holidays there and the son in particular used the chalet from March until October, his behaviour making it difficult to find other forms of holiday accommodation such as hotels to accommodate him. The claimant’s benefit claim was refused on the basis that he was the beneficial owner of the chalet and its value exceeded the upper limit for entitlement. The tribunal upheld the decision and the case then went to the Commissioner who set it aside as the tribunal had erred in law by not considering matters such as whether the purchase of the chalet gave rise to a presumption of a resulting trust in which case the claimant was not the owner of the chalet.
The following are some of the benefits not affected by any capital or income from trusts:
Trust law can be complicated. If you wish to set up a trust it is advisable to seek professional help from a solicitor who can draw up a trust deed or a will.
A discretionary trust, set up under a deed or a will, may be the best type of trust for the benefit of a person who is or may in the future need to claim means-tested benefits or tax credits.
The tax system allows for the creation of disabled person’s trusts for inheritance tax purposes. These are set out in sections 89, 89A and 89B of the Inheritance Tax Act 1984. The provisions laid down in the Finance Act 2006 provide a definition of ‘disabled person’ linked to the definition of ‘mental disorder’ under section 1 of the Mental Health Act and to those able to qualify for the middle or higher rate care component of DLA or to AA (any rate).
Professional advice from a solicitor or accountant should also be sought on the income tax, capital gains tax and inheritance tax implications relating to trusts that are not covered in this article.
Disability Alliance would like to thank the Low Income Tax Reform Group for their helpful comments and suggestions and refer readers to their website: www.litrg.org.uk .
You can also find out more information about trusts in Disability Alliance's Disability Rights Handbook, available to buy at www.disabilityalliance.org/drh35.htm.
You can also obtain copies of our publications by contacting Disability Alliance on 020 7247 8776 (voice and minicom) or by fax on 020 7247 8765.
www.disabilityalliance.org - April 2009
