Factsheet on Personal Injury Compensation Protection Trusts
This factsheet, which states the law as at June 2007, should be read by you if you have instructed us or you are contemplating instructing us to act in a claim for compensation arising out of a personal injury and you are:-
- In receipt of means assessed state benefits themselves or,
- A member of a family unit where another member receives means assessed state benefits or,
- May at some time in the future receive means assessed state benefits or be a member of a family in receipt of such benefits.
Payment of the compensation where the claim succeeds may affect the entitlement to the benefits listed below and may affect the position of your estate (on your death) with regard to inheritance tax.
Means Assessed State Benefits
The most common means assessed state benefits are:-
- Income Support, including these “passported” benefits:-
- Housing Benefit
- Council Tax Benefit
- Free School Meals
- Free Healthcare/Prescriptions
- Pension Credit (Income Support for those 60 years and over) such as:-
- Further Savings Credit
- Guarantee Credit
- Job Seekers Allowance (Income Based)
- Housing Benefit
- Council Tax Benefit
These are some examples of the benefits which are not means assessed and any savings or capital held does not affect your entitlement:-
- Disability Living Allowance
- Employment Support Allowance
- Carers Allowance
- Industrial Injuries Disablement Benefit
- Independent Living Fund Awards
Savings and General Means Assessed Benefits (Except Housing Benefit and Council Tax Benefit)
There are three sets of circumstances:-
(a) if your family unit will hold savings of less than £6,000 even when you receive your compensation from your personal injury claim, your means assessed benefits are unlikely to be affected.
(b) if your family unit will hold savings of between £6,000 and £16,000 when you receive your compensation the recipient of state benefits may lose £1 per week for every £250 held over £6,000 and up to £40 a week may be lost if the capital is £16,000.
(c) if your family unit will hold savings in excess of £16,000 when you receive compensation from a personal injury claim, your means assessed benefits will be suspended for a number of weeks calculated below:
Weekly benefit: £100.00
Surplus of £16,000 = £4,000.00
£4000 ÷ £100 = 40
Therefore the benefit is suspended for 40 weeks until funds are reduced to £16,000 and a fresh application must then be made. Thereafter a reduced benefit of £60 is payable, there being a deduction of £1 for every £250 held over £6,000.
Note 1: A couple or a family of 6 are fixed with the same capital limits of £6,000 to £16,000.
Note 2: The savings or capital of a child of less than £6,000 is ignored.
Note 3: If, however, a child holds more than £6,000 it is only the child related element of the benefit which is affected.
Savings and Housing Benefit/Council Tax Benefit
Inheritance Tax is charged at 40% of the value of the estate over a certain limit*.
The amount of your savings and the value of your home may already create a potential tax liability for your next of kin. Payments of compensation from a successful personal injury claim can compound the problem. If you require advice concerning tax advantageous estate planning, this is beyond the scope of this factsheet and we would suggest that you contact our Probate Department.
*£300,000 as at July 2007.
How A Personal Injury Compensation Protection Trust Can Help You
- A claim for an injury or industrial disease
- A clinical negligence claim
- A criminal injury compensation claim
- A claim to the Motor Insurers Bureau arising out of a road traffic accident with an uninsured and untraced driver
- Compensation received by suing a solicitor for the negligent handling of a personal injury claim as described above can be paid into a Protection Trust. Capital held in a Protection Trust is disregarded for the purposes of a means assessed state benefits or for the entitlement to financial assistance in long term residential care.
The scheme does not work for a fatal claim – the only person who can set up a Protect Trust is the injured person themselves.
Protection Trusts and Children/Mental Patients
When Is The Best Time To Set Up A Protection Trust?
The 12 Month Exempt Period
There is a period of 52 weeks beginning with the day upon which a Claimant first receives any payment in consequence of a personal injury claim before the capital is taken into account for the purposes of certain means assessed benefits. The reference to any payment therefore includes a reference to interim payments or possibly even an ex gratia payment from an employer! However, there is no 12 month exempt period for long term residential care.
The Effect of the Protection Trust
The simplest form of Protection Trust is called a “Bare Trust” and is the best to use in most cases. In simple terms, the legal title to the compensation is transferred to trustees and the recipient of the compensation retains the benefit of the trust which is a right to receive income and capital payments and to control the trustees. If trustees refuse to make a payment they can either be replaced by the recipient of the compensation who may even bring the trust to an end, though bringing the trust to an end may affect any means assessed state benefits. On death, the fund falls into the estate of the recipient of the compensation and it may affect the inheritance tax position. There are no tax advantages of a bare Protection Trust, but there are no tax disadvantages either so whilst the bare Protection Trust is tax neutral (providing a Bare Trust is used) it is an efficient way of avoiding the capital holding rules of means assessed state benefits. Some other types of Protection Trust do trigger taxation payments, however. This is the main reason why a “bare trust” is preferable.
You should attempt to choose between two or three trustees who should be close or trusted family members who are not currently (or have been previously) bankrupt or subject to an Individual Voluntary Arrangement by reason of personal indebtedness. At least one trustee should be a member of a professional body such as a solicitor or accountant.
If a solicitor or professional person is chosen there is likely to be a fee for the annual administration of the trust. The fee level is unlikely to exceed £150 to £250 plus VAT and the work done is for the preparation of annual accounts and completing the tax returns of the trust. If you are prepared to undertake this work yourself, the fees can be much lower.
Investment of the Funds in a Protection Trust
Trustees are under a duty to properly invest the trust fund. Investment advice from an Independent Financial Adviser may be necessary in funds over £15,000 for which there may be a separate fee. Though many Financial Advisers receive commission payments from the organisation with whom investments are placed, it may be much cheaper to pay the advisers fees direct. Income received by the trust capital is disregarded for the purposes of means assessed state benefits provided it is added to the capital. Alternatively, it can be paid out to the recipient of the compensation, but there is a danger in doing so.
Payments Out Of The Protection Trust
Payments of interest or income to the recipient of the compensation by the trustees can be disregarded if:-
- The amount is less than £20 per week or,
- It is used to pay for luxury items which state benefits are not intended to provide. In this way it must not be used for every day expenditure upon food and clothing.
Accordingly, payments for luxury items are best made directly by the trustees rather than via the recipient.
Payment of capital will reduce the invested funds but capital payments can be made, though the receipt of capital may affect entitlement to means assessed state benefits. Again, it is better that payment is made through the trustees. For example, if the recipient of the compensation wishes to purchase a holiday, the trustees can pay the travel agent directly.
What Are the Costs of Creation of a Personal Injury Compensation Protection Trust?
The costs of setting up a trust are generally between £700 plus VAT, for our own clients and about £1000 plus VAT if we have not handled the injury claim though some organisations charge more.
If you feel you require further information please ask.
The law stated here is at June 2007