My son was in the armed forces but, since coming back from Afghanistan with injuries, he has been reliant on state benefits for income. However, he has recently received a large interim compensation payment and more is expected. Will this rule him out of receiving means-tested benefits?
Helen Freely, partner at solicitors Ambrose Appelbe, says that people have a similar problem after personal injury or clinical negligence situations but – in many circumstances – a Personal Injury Trust can be established to protect eligibility for means-tested benefits.
A Personal Injury Trust is a trust fund set up out of damages or compensation paid as a consequence of personal injury.
It can be set up by the recipient of the compensation within 52 weeks of receipt of an interim or final payment. Generally speaking, though, it is better if the cash is not received by the injured individual but paid directly to the trust.
Assuming that the damages are paid directly to the Personal Injury Trust and it is structured as a discretionary trust so that the individual has no automatic right to the funds, the monies are not treated as an individual’s capital for the purposes of means-tested benefits.
If the compensation is paid direct and the injured party meets criteria set out in Section 89 of the 1984 Inheritance Tax Act – for example, being in receipt of certain disability benefits – there is also no tax on the transfer.
Normally, lifetime transfers into trusts incur an immediate tax charge of 20 per cent on the value over and above the nil-rate band for inheritance tax (currently £325,000).
A Personal Injury Trust requires two or more trustees, one of whom can (but need not) be the injured person. Further interim payments or the final payment of compensation can be added to the fund.
It is always important to think long-term when a compensation payment is received, and to consider setting up such a trust if, for example, the recipient might need state benefits at a later date or require long-term care.
Personal Injury Trusts have other uses as well as ringfencing a claimant’s capital from a means-tested benefit assessment.
Many people are unaccustomed to handling large sums of money and managing its investment. Some may be worried in case their compensation is dissipated on divorce and would like to see it protected. Others will want to ensure their award can be used for the benefit of their dependants, as well. Some may be left with mental capacity issues and therefore need the help of trustees to control and manage their fund on a daily basis.
The discretionary trust itself will still be subject to tax: with income returns taxed at 50 per cent, capital gains taxed at 28 per cent and the usual 10-yearly inheritance tax charges of up to 6 per cent. So these higher tax rates need to be considered before a larger award is committed outright.
However, if the discretionary trust is also eligible to be a disabled trust – which depends on the beneficiary’s entitlements to state benefits – the disabled individual can reclaim the tax.
There is no reason such a trust could not be used for the benefit of someone coming back from Afghanistan or another war zone with injuries. But it should be established with caution, because there is no one size fits all – and you do need to bear in mind that the injured and their families could be locked into this structure for some time.
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