Personal injury trusts and working tax credits

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.

Help on personal injury trust 0330A personal injury trust does not protect you from tax, it only means the compensation should not be taken into account when assessing means-tested benefits.

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.

I am happy to chat without obligation on 0330 223 1708

 

 

About Mark Thompson

Personal injury and accident specialist solicitor
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18 Responses to Personal injury trusts and working tax credits

  1. Bella says:

    I am due to receive significant compensation for personal injury in the next year or two and have received one interim payment in Jan ’17 for £3k. This was paid into my bank account and remains there. I receive both child and working tax credit until the end of Aug ’17. I expect to use this £3k to contribute to the purchase of a more suitable (automatic) car, on medical advice, before the end of this year. I intend to set up a bare PI Trust soon so that further interim payments can be paid directly into a trust bank account.

    What if any impact will the above have on my child and working tax credits? I think that as the £3k payment is capital rather than income, I do not need to declare it, but I do need to include any income (interest) arising from it. Is this right?

    • Mark Thompson says:

      If you only receive tax credits, receipt of compensation is irrelevant. Tax credits depend on income, not capital, so your understanding is correct.
      When you are to receive another interim payment, or final settlement, you should think hard about a trust. Personal injury trusts are not just for those actually receiving benefits, as a trust will protect your entitlement in the future to benefits and financial assistance with care.

  2. Susan Gritt says:

    Hi. I am currently in receipt of child tAX CREDIT FOR MY DAUGHTER AGED 17.(SHE IS STUDYING FOR ‘A’ LEVELS). ON HER 18TH BIRTHDAY, SHE IS DUE TO RECEIVE A COURT PAYMENT FOR COMPENSATION FOR BIRTH INJURIES EXPECTED TO BE IN REGION OF £150,000. THIS IS MY DAUGHTER’S MONEY TO ENABLE HER TO LIVE THE REST OF HER LIFE -WILL I STILL BE ELIGIBLE FOR CHILD TAX CREDIT DUE TO MY LOW INCOME??

    • Mark Thompson says:

      Child tax credit is based on your taxable income, not capital held by you or family members. Fo rthos ewith trusts, there is more information about tax credits here.
      Your daughter may want to think about setting up a trust to receive her compensation, as once the money is paid over it will be taken into account against her benefit entitlement.

  3. George Shepherd says:

    Can I pay for funeral arrangement for me, aged 90, from my pi trust fund without it affecting my guaranteed pension credit benefit. Regards……..George Shepherd

  4. Mrs Greystoke says:

    My statutory sick pay stopped, as did my working tax credits as I was now classed as unemployed by them. (Still have my work contract but unable to work) Solicitors has stated that they could request an interim £1000 to cover bills. My daughter is on a bursary in private school studying for Gcse’s. Should I set up a trust, if so which one? I will have large bills from creditors at the end of my claim which I would want to pay. Van you please advise? (I am a single parent )

    • Mark Thompson says:

      If you are only going to receive an interim payment of £1,000 and this is your first interim payment, I doubt you need a trust now. I am assuming the payment of £1,000 will leave you below £6,000 in terms of any money you hold. If a more substantial interim payment is made, or final settlement is reached, that is the time to set up a trust.
      You ask which type of trust is necessary. In most cases a bare trust is suitable.

  5. Naj says:

    Hi there,if I put 25,000 pound in personal injury trust account,how much should I pay for tax man from 25000 pounds?many thanks

    • Mark Thompson says:

      Personal injury compensation is not taxed. You will be liable to tax on any income received on the compensation, but there is no tax on the compensation itself.
      What you need to set up a trust is a legal document called a trust deed. Once that document is signed by you and the trustees, the trustees will set up a bank or building society account to hold the compensation.
      It is the trust deed which creates the trust, not the bank account.
      Trustees should also note they are not limited to using just one bank or building society account. Subject to the powers given to the trustees in the trust deed, trustees have great freedom to invest the trust fund under their control.

  6. laura says:

    Hi

    My husband has recently received compensation of £13,500 for a knee injury that happened at his work. We are confused whether this will affect our tax credits. We usually only get child tax credit but are getting a little bit of working tax this year also as our income was down the previous year due to my husband being on sick and myself on maternity leave. We plan to pay off debts and save £10, 000 for a deposit on our house. This will be split between our isas until needed. I’ve just read about the trust. Do we need one or should we be ok. We dont claim any other benefits.
    Thank you

    • Mark Thompson says:

      Tax credits are based on your income rather than capital. If you are unlikely to need any other benefit in the foreseeable future a trust looks unnecessary.
      If you do receive interest on the compensation and that is enough to reduce you tax credits then you should explain the income has come from personal injury compensation. HMRC will ignore the interest for the first year after receipt of compensation, but without a trust the income will be taken into account beyond that time.
      You can see more detail by clicking here.

  7. Sophia says:

    Hi

    Please could someone help answer this. I receive some state benefits like tax credits and housing benefit. I have recently settled a fatal accidents claim. The money is substantial but not enough that I can just give up these benefits. Is there some way I can protect these benefits ? I understand that you cannot set up PI trust for fatal accidents claim? Is there anything I can do. My solicitor and an IFA are in disagreement, and I just need a straightforward answer. Many thanks.

    • Mark Thompson says:

      It is the case that only the injured and compensated person can set up a trust and still claim means-tested benefits. In a case where the injured person dies the family are usually receiving compensation for the loss of a bread winner. It seems unfair that this compensation, which is mainly financial loss due to a fatal injury, cannot be protected.
      There are possibilities in that a trust is only one of a number of capital disregards, and a different type of trust might do the job.

  8. Julie says:

    Is it possible to buy a holiday home abroad with trust fund monies. Will this be treated as capital when people are moved from tax credits to universal credit?

    • Mark Thompson says:

      As I understand tax credits, it is your income which is relevant rather than your capital. The system is administered by HM Revenue and Customs. You entitlement to tax credits depends on your taxable income, so if you have a bare trust which holds compensation from a personal injury the income on the trust money will be taxable as yours, and should be declared when applying for tax credits. Please note what is said on this page, and do point out to the Revenue the amount of income which comes from the personal injury trust assets.

      If you are only receiving working tax credits you will continue to receive those for the meantime. I cannot see a date for you to be changed over to Universal Credit if you are only receiving Working Tax Credit.

      If you become a claimant of Universal Credit your tax credit payment will come to an end – see http://www.hmrc.gov.uk/taxcredits/universal-credit.htm#2 For example this could happen if you started living with someone who is in receipt of Universal Credit.

      You ask if a personal injury trust can hold property. The answer is yes subject to the ability for the trustees to buy property being included in the administrative provisions of the trust. You say the property is abroad, so you will also have to check trustees can hold property in the country in question. Please note if the trust buys the property for you personally, the property is yours and loses the protection of the trust. If the property is held by the trust then it remains protected from the means-testing of the benefit paying agencies.

  9. Charles says:

    Great article and very informative. But I got a question: Do I need to inform the Benefits Agency of the existence of the Trust?

    • Mark Thompson says:

      You have an obligation to notify any change in financial circumstances so once trust is set up tell all agencies from which means tested benefits are claimed. They only need to know compensation has been received and a trust has been set up. Notify by letter and keep a copy to avoid argument.

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