Three million individuals each year will suffer some type of personal injury. The compensation can be placed into a special type of trust and protected from being taken into account by the authorities when determining present and future means tested benefits.
As the name suggests, a personal injury trust is a trust into which personal injury compensation is placed. Technically, it is a ‘settlor interested trust’. This means that the individual, who has received compensation/damages from a personal injury claim, settles them into trust for their own benefit and that of their family. This is done, not with tax planning in mind, but to protect the money from means testing, so that state benefits continue to be paid without taking the lump sum into account, which would otherwise disentitle them. One key feature of the personal injury trust is that it will need a professional trustee, or specialist advisers to advise the trustees in order to ensure that the trust fund is not taken into account in means testing. The trustees should ensure that the trust assets are not used for everyday living expenses. Even if the individual does not get means tested benefits right now they may wish to protect the compensation from the growing cost of long term care. This is a big concern for many individuals and can be avoided by using Personal Injury Trusts.
Normal expenses of daily living are supposed to be met by means-tested benefits. These include gas, water, electricity, food, mortgage interest, council tax, rents and payments for residential care. These should, as far as possible, continue to be met by means tested benefits. If there is a shortfall to these bills then can be met from the trust along with other expenditure such as buying a car or paying for a holiday. The compensation is invested to protect the assets and to make the most of the compensation. £5,000 can be withdrawn from the trust each year without giving rise to a tax liability.
Personal injury trusts are not simple and need to be tailored specifically to the circumstances of the individual involved. The trust should always, in an ideal world, be put in place before any payment is received. Once the trust is signed the benefits agencies dealing with the individual’s means tested benefits need to be informed of the change in circumstances. They do not need to know how much money has been received but should just be told that an amount in excess of the means tested benefits lower capital limit has been received and placed into a trust. The tax situation of the personal injury bare trusts is unique. The trust is not a tax entity in itself and also does not have to be registered with HMRC. The income and capital gains of the trust are the income and capital of the beneficiary. The beneficiaries own personal tax return should be completed to include all the trusts income and capital. For tax purposes therefore, including Inheritance Tax, such trusts are entirely tax neutral.