When you apply for most state benefits, a means tests will look at your capital and income. Working tax credits is not a means-tested benefit. It is an adjustment to your earnings based on your income alone.
It is only income from savings which affect tax credits, not the savings themselves. You can find a helpful explanation about tax credits and capital and savings.
So what protection is provided by a personal injury trust?
A 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.
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 would normally be taken into account. But if the income is on an asset held in a personal injury trust and the income 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 paragraph 16 which excludes income “under a trust derived from a payment made in consequence of a personal injury…”
So that says if you can receive 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 received by a personal injury trust in your tax return. This applies if you have a bare trust, 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.
This page will lose significance, as tax credits can no longer be claimed. Their role is replaced by Universal Credit, which is a means tested benefit, which takes account of funds over £6,000.
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Hi Mark,
A quick clarification needed if you could please. My wife suffered a brain injury due to a car accident and has restricted ability in work. We were going to court over the matter, however it was settled at the final hour and payment was made quite quickly.
We had no fund set up and the money was transferred to a dormant Deposit account.
We have not used the money, however my question is this… As I understand it the personal injury compensation is classified as an asset and not income for Child benefit and family tax credit awards…
So firstly as the funds were transferred to an account and not directly into a trust is this an issue or does the 52 week allowance enable us to still transfer the fund to a trust. Secondly as we only receive benefit for the above two areas, do we need to set up a trust, so as not to effect the benefit? As if these two benefits do not see the compensation as income.
I look forward to your advise so we can move in the correct direction.
Best wishes.
You do not need a trust to protect receipt of Child Benefit. This depends on household income and the compensation is not income.
The same applies for Tax Credits, but any income or interest earned on the compensation will form part of your income and could reduce your Tax Credit payments. You can read more here.
A trust for compensation protects receipt of means-tested benefits and local authority care. You should look ahead, think about what you intend to do with the money and ask will the family ever need benefits or care. Think about the need for a trust in this context rather than just looking at today’s benefits.
Tribunal said that
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…”
is not applicable as we received the payout and then made an application
judge says of this regulation you have to fulfill part 1 first
Claimants to whom income becomes available upon the making of a claim
16.—(1) If income would become available to a claimant upon the making of an application for that income he is treated as having that income.
basically they argue that because a lump sum was received on april 2016 and we informed hmrc 3 days later that a lump sum was received into a personal bank account after which we learned we could set up a trust to secure this payout they say because the payout was already received this regulation is not applicable at all.
they also say they have never heard of the 52 week disregard period to set up a trust in which the compensation should be disregarded, Do you have the regulation for this?
thank you for your help!
Tax credits are not means-tested benefits, so try to avoid confusing one with the other.
The 52-week disregard is part of the Income Support regulations and is carried through into the rules about most other benefits.
Receipt of the compensation itself is irrelevant for tax credits, as the compensation is not income. The only timing issue, is when you received the income.
Tax credits are based on your income and what is income for tax credit purposes is defined in The Tax Credits (Definition and Calculation of Income) Regulations 2002. Paragraph 16 provides one of the definitions of what is income and “does not apply in relation to income — (a)under a trust derived from a payment made in consequence of a personal injury;”
I think income on the assets of a personal injury trust is not included as income.
thank you
The judge told us this; as we have received the compensation before making the claim IT IS treated as income regardless of being put in a trust.
He says you have to comply with the first part of a legislation first before you can rule anything out. SO SINCE WE RECEIVED PAYMENT IN APRIL 26 2016 AND CONTACTED HMRC AFTER HE FINDS THAT IT IS TREATED AS INCOME.
IS THIS CORRECT? PLEASE HELP
Claimants to whom income becomes available upon the making of a claim
16.—(1) If income would become available to a claimant upon the making of an application for that income he is treated as having that income.
Reading between the lines, I think you have received compensation and then set up a trust at some later time.
A trust only protects personal injury compensation from the date it is set up.
If you want a more precise answer you will have to give details of all benefits, when you made the claims and the date of receipt of all compensation. You should also tell me how much compensation was spent before the trust was set up.
If a trust for compensation makes payments to you, capital or income, that money loses the protection of the trust. Money in your hands is taken into account for benefits, no matter what its source.
If the question is about Tax Credits and treatment of trust income, the answer lies in the two links included in this page. If there has been a judicial decision on this point, do please email it to me.
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?
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.
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??
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.
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
You can indeed. You can also pay for a holiday.
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 )
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.
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
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.
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
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.
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.
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.
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?
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.
Great article and very informative. But I got a question: Do I need to inform the Benefits Agency of the existence of the Trust?
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.