Disability Alliance UK (United Kingdom) - response R44 - Inland revenue proposals: modernising the tax system for trusts

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Disability Alliance response R44

RESPONSE TO INLAND REVENUE PROPOSALS: MODERNISING THE TAX SYSTEM FOR TRUSTS

DEFINITION OF VULNERABILITY

1. Disability Alliance has been engaged in the consultation process with the Inland Revenue over reviewing the taxation system for trusts. In particular, with regard to the workability of the proposals for defining who is to be treated as vulnerable.

2. When looking at categories of disabled people the Inland Revenue wish to apply the current test for Capital Gains Tax which uses definitions from the Mental Health Act and an individual’s entitlement to attendance allowance or disability living allowance (DLA) care component at the highest or middle rates.

3. The government’s objectives are that a modern tax regime for trusts should achieve a system which is fair, supports the competitiveness of the UK economy and is clear and easy to operate.

Defining categories of disabled people

4. The proposals to restrict eligibility to those mentioned in paragraph 2 above appears to be far too restrictive and would exclude many disabled people who are currently defined under social security legislation. In this regard it would not appear to fit in with the government’s proposal of fairness.

5. Social security legislation contains various qualifying tests of disability for benefit purposes.

Recommendations

6. Disabled people should be able to receive favourable treatment under the new proposals and the definition of disabled should be widened to include people who already satisfy other disability tests within the social security system.

7. In addition to the categories of disabled persons covered in paragraph 2 above the following should be added. People who are in residential care or long-term NHS hospital care or in receipt of one of the following benefits:

- No contribution incapacity benefit;
- Qualify for exemption from council tax due to being classified as ‘severely mentally impaired’;
- Qualify for a disability reduction on council tax due to being classified as ‘substantially and permanently disabled’; and,
- All persons who are exempt from the personal capability assessment for incapacity benefit as defined in Regulation 10, Social Security (Incapacity for Work) General) Regs 1995, as set out below:

Personal capability assessment exemptions

You are exempt from the personal capability assessment test if you:

are in receipt of the highest rate care component of disability living allowance
are assessed as 80% disabled - for war pension, industrial injury or severe disablement allowance purposes
are terminally ill with 6 months or less to live
are tetraplegic
are paraplegic or have virtual paraplegia due to uncontrollable involuntary movements or ataxia
are in a persistent vegetative state
are suffering from dementia
are registered blind
have severe learning disability - defined as a condition which results from the arrested or incomplete physical development of the brain, or severe damage to the brain, and which involves severe impairment of intelligence and social functioning
have severe and progressive neurological or muscle wasting disease
have a progressive impairment of cardio-respiratory function
have dense paralysis of upper limb, trunk, and lower limb on one side of the body
have multiple effects of impairment of the function of the brain or nervous system causing severe and irreversible motor, sensory and intellectual deficits
have severe mental illness - defined as involving the presence of mental disease which severely and adversely affects a person's mood or behaviour, and which severely restricts their social functioning, or the awareness of their immediate environment
have manifestations of severe and progressive immune deficiency states characterised by the occurrence of severe constitutional illness or opportunistic infections or tumour formation
have active and progressive polyarthritis

Interaction between trusts and the benefits system

8. Many disabled people rely on means-tested benefits to provide them with a basic income or top up a low income. There is already provision within the income support rules to disregard trust funds created from payments for a personal or criminal injury. Payments made under some specified trusts such as the Macfarlane Trusts, the Fund, the Eileen Trust or the Independent Living Funds are disregarded.

9. For the proposed new tax regime for trusts to benefit those most vulnerable it is vital that the Department for Work and Pensions is involved and provision for disregarding the trusts implemented within the relevant legislation.

Summary

10. The definition of disabled needs to be widened. The recommendations for defining disabled people as set out above use existing legislation as their basis and in this respect allow for clarity and ease of operation.

11. For the new tax system for trusts to benefit disabled people, provision needs to be made within the social security regulations to disregard the trusts.

Disability Alliance
5 November, 2004

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