Most means tests for benefits look at your capital and income. Working tax credits looks at your income alone, so what protection is provided by a personal injury trust?
I was asked a question by a man confused by the advice offered on websites, particularly some of the discussions of tax experts! Phil received a large compensation award following a personal injury compensation claim. Quite rightly he was advised to protect his means-tested benefits position by setting up a personal injury trust. Rather than play the stock market he invested the compensation in property, and he receives rent, and that rent is paid into the personal injury trust bank account. Phil does not work but his partner does, and the level of earnings allow a claim for working tax credit. Working tax credit is based on income alone, and of course rent from a property is taxable income.
When I first responded to the question I said that a personal injury trust does not make income from the trust tax free, so you should include income on trust funds and assets in your tax return. This is the case if you have a bare trust, but will be different if you have a discretionary trust.
I advised entitlement to tax credits is based on income rather than capital. If you are receiving another means-tested benefit you are automatically entitled to tax credit at the full rate. If you are only receiving tax credits, and no other means-tested benefit then income from a property would normally be taken into account. But if the property is held in a personal injury trust and the rent is paid into the trust this income should not reduce working tax credits.
The answer lies in the The Tax Credits (Definition and Calculation of Income) Regulations 2002 . Follow the link and see page 49 which at paragraph 16 seems to exclude income “under a trust derived from a payment made in consequence of a personal injury…”
So that says if you have income from a personal injury trust it will not be taken into account when calculating your entitlement to working tax credits. Good news for those who rely on working tax credit. There is a helpful note on the HMRC website which confirms this.
What you must do is include income from a personal injury trust in your tax return. This applies if you have a bare trust, and most personal injury trusts are bare trusts. You must also declare the income from the trust when applying for working tax credits, as if you do not the difference between your application and your tax return will be obvious. When declaring the income make sure you tell the Revenue about the trust and point to the Regulation above to explain why the income should not be taken into account.
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