If you receive compensation for personal injury, you must inform the agencies handling your claim for means-tested benefits. It is the change in your financial circumstances which makes notice necessary.
If I prepare a trust for you, I will inform the benefit agencies you have received personal injury compensation and I have set up a trust for that compensation.
It seems to be the case that if I give notice of a personal injury trust, the path is smoother. The benefit agencies are entitled to ask questions, but the questions asked recently suggest the agencies are checking to see if the trust has been set up properly and in time. You may be asked to prove you have a separate bank account for the trust and that the compensation has been paid into that account. You may be asked the date of the trust, and the date of the first payment of compensation, if you have had interim payments. You have no choice but to cooperate, as the agency paying the benefit holds the purse strings.
The benefit agencies are starting to ask how the money in a trust bank account is accessed. If the compensated person is a trustee and can access the money personally, there will be a very strong argument you have not got a proper trust.
“Benefits” such as working tax credit are more complicated. The “benefit” is managed by HMRC and your entitlement is based on your taxable income. Setting up a personal injury trust does not immediately change your taxable income. So I do not give notice of the establishment of a personal injury trust to HMRC. When you next advise HMRC of your taxable income, you need to see if income from the trust has changed your entitlement. If there is a change, then HMRC should be told of the trust and they should be asked not to take account of the income from the trust. This point is dealt with in greater detail if you click here.
I write bare trusts to hold personal injury compensation. A bare trust is not registered with HMRC for tax purposes, as it is the beneficiary of such a trust who is treated as the taxpayer. If the trust receives income or a capital gain, this is included within the personal tax return of the beneficiary. The good news is the personal tax allowances of the beneficiary can be used.
If you have set up a discretionary trust to hold personal injury compensation then notice of the establishment of the trust should be given to HMRC. This is because a discretionary trust is taxed in its own right. A discretionary trust can be useful for personal injury compensation, but great care and advice must be taken to see if a discretionary trust has advantages for you.