Disabled Persons' Trust vs Discretionary Trust: What Is the Actual Difference?

By Neha Mehta | Chartered Accountant, Financial Coach and SEND Parent

When anyone starts looking into trusts for their disabled child, "Discretionary Trust" is probably the term they heard most. It's the one that comes up most often in conversations with solicitors and in general estate planning content. "Disabled Persons' Trust" is mentioned far less, and when families do hear about it, it's often unclear whether it's a different thing entirely or just another name for the same structure. And if different, how is it different and which one should you choose?

It's a different thing entirely, and the difference is mostly about tax.

What is a Discretionary Trust?

A Discretionary Trust is the most commonly used trust in estate planning generally, not just for disabled beneficiaries. Trustees have full discretion over how and when money is distributed, guided by a Letter of Wishes rather than any fixed entitlement.

For SEND families, a Discretionary Trust does protect your child's benefits, because the money sits outside their direct ownership. But the tax treatment is something I had to look into carefully, because it's rarely explained upfront.

Income inside a Discretionary Trust is taxed at the trust rates that apply to most income and dividends, above a small standard rate band. Capital gains above the trust's annual exempt amount are taxed at the trust rate. Every ten years, the trust faces a periodic inheritance tax charge on value above the nil-rate band, with further charges when assets leave the trust between those anniversaries.

For a trust intended to support someone for decades, this is the part of the picture that's easy to miss until you've already set things up.

What is a Disabled Persons' Trust?

A Disabled Persons' Trust is a specific type of trust for someone who meets the qualifying disability criteria. It offers the same benefit protection as a Discretionary Trust, meaning the money sits outside the beneficiary's direct ownership. The tax treatment, though, is structured very differently.

Income inside a Disabled Persons' Trust is taxed using the disabled person's own rates and personal allowances rather than the trust rates above. For someone with no other income, this often means little or no income tax at all. Capital gains are taxed at the disabled person's own rates and allowances too. And there are no ten-year anniversary charges and no exit charges during the disabled person's lifetime.

One thing worth knowing: this tax treatment is not automatic. Trustees need to file a Vulnerable Person Election, form VPE1, with HMRC each tax year to claim it. It is the kind of administrative detail that a solicitor or accountant managing the trust should be tracking, and worth confirming is included in their annual fee when you discuss costs upfront.

Why is the tax so low inside a Disabled Persons' Trust?

This is worth explaining properly, because it surprises a lot of people.

In the UK, every individual has a personal allowance, which is the amount of income they can receive in a tax year before paying any income tax at all. Inside a Disabled Persons' Trust, income is taxed as if it belongs to the beneficiary directly, using their personal allowance. If the beneficiary has no other income, as is the case for many young disabled adults, their full personal allowance is available to offset income generated inside the trust.

This is the structural advantage that a Discretionary Trust simply cannot match. A Discretionary Trust pays tax on income from pound one, regardless of how much the beneficiary has or earns elsewhere. Over a single year the gap is modest. Over a lifetime, it compounds.

The shape of the difference

The two structures start in the same place. Over a lifetime, they end up somewhere very different.

The chart below shows what happens to an identical starting fund in each trust, with the same amount withdrawn each year for the beneficiary. Both cover the withdrawals. Only one is still standing at the end.

The mechanics behind this are simple. A Discretionary Trust pays trust-rate tax on income from pound one, plus a periodic inheritance tax charge every ten years. A Disabled Persons' Trust uses the beneficiary's own personal allowance, and there are no ten-year charges during their lifetime.

Over one year the gap is small. Over thirty, it compounds into the difference between a fund that sustains itself and one that quietly hollows out.

I am working through a fuller numerical analysis, covering starting fund values, withdrawal levels, tax rates by band, the effect of the ten-year IHT charge, and setup and ongoing running cost estimates, in a follow-up post: Disabled Persons' Trust vs Discretionary Trust: The Numbers (coming soon).

What does it cost to set up and run?

Setup and ongoing running costs are not negligible and vary widely depending on the solicitor, the complexity of the trust, and whether a professional is engaged for annual administration. A Discretionary Trust also incurs the cost of an Inheritance Tax return at each ten-year anniversary. A Disabled Persons' Trust needs an annual Vulnerable Person Election (form VPE1) filed with HMRC. In most cases a solicitor or accountant administering the trust will include this in their annual fee, but it is worth confirming upfront.

Costs compound over decades, and for smaller funds they need to be looked at carefully to make sure administration does not erode the fund disproportionately. A STEP qualified solicitor can give you a clear breakdown for your specific situation before you commit.

I am working through likely setup and running cost ranges in the follow-up numbers post referenced above.

Eligibility comes first

A Disabled Persons' Trust is not available to every family. Your child needs to meet specific qualifying criteria, which I have gone through in detail in a separate article: Does My Child Qualify for a Disabled Persons' Trust? If your child does not currently qualify, a Discretionary Trust may still be the right structure, just with the tax treatment described above factored in.

What I chose, and why I am not telling you what to choose

I looked at both of these closely for Udi. She qualifies for a Disabled Persons' Trust, and given the difference in tax treatment over what could be decades, that is the structure written into my Will for her.

I am sharing that because I think real examples help more than abstractions. But I am not going to tell you it is the right answer for your child, because I do not know your child's eligibility, your estate, or your family's specific circumstances. Those are exactly the things a solicitor needs to know before recommending a structure, and they are exactly the things an article cannot know.

If your child has a Will-based trust already in place, it may be worth checking which type it is. A solicitor with the STEP qualification, Society of Trust and Estate Practitioners, specialises in exactly this kind of planning and is the right person to confirm what is appropriate for your family.

A note on tax rates

The rules referred to in this article reflect the current UK tax framework. Tax rates, thresholds, and trust rules do change, and what is accurate now may not be accurate in future years. Before making any decisions, please check current rates with a solicitor or accountant, or via GOV.UK's guidance on trusts and taxes.

I will update this article when I become aware of material changes, but please treat any specific figures in financial articles, including this one, as an approximation and a starting point for questions rather than a final answer.

If it helps to think this through out loud with someone who has been through it as a parent as well as a Chartered Accountant, that is exactly what my discovery calls are for. Book a free 30-minute discovery call.

Related reading: Does My Child Qualify for a Disabled Persons' Trust? and What Happens to My Disabled Child When I Die?

Next in this series, I will be looking at how to choose trustees and what goes into a Letter of Wishes, the two decisions that sit alongside whichever trust structure a family chooses.