What is a personal injury (PI) trust?
At present, if you receive compensation for a personal injury, the amount will be taken into account if you are assessed for means-tested benefits such as income support, housing benefit, council tax benefit and job seekers allowance. As a general rule, if you have over £6,000 (or £10,000 if you are a permanent resident in a care home) of compensation the level of income is reduced; and if you have over £16,000 you normally lose all entitlement to income support.
One way of protecting both your compensation money and any benefit entitlements is to transfer the money into a personal injury trust, also known as a PI Trust. If you do this, you can receive both income and capital and the fund is not taken into consideration for the purpose of assessing you for benefits.
How can a personal injury trust preserve my benefits?
A personal injury trust can help to protect your money not only now but also in the future if you have to go into residential care at some point. If you were to give your compensation money away (to your children for instance), the tax authorities would treat this ‘gift’ as a “deprivation of capital”. In other words, you are assumed to be giving away your assets for the sole purpose of becoming eligible for benefits. Consequently, for means-tested benefits you are still treated as owning those assets. However, a gift to a personal injury trust is not treated as an intentional deprivation of assets.
What about trustees?
You normally need to have two people acting as trustees. Although it is possible for you to be one of them, it can be advisable to have two trustees, other than yourself, such as adult members of your family. A partner in our firm can also be one of the trustees. You will need to open a bank account for the trust into which the compensation monies can be paid.
What about tax?
There are no particular income tax, capital gains tax or inheritance tax advantages of personal injury trusts and any income generated by, or capital released from, the fund would be taxed in the normal way.
This article has been updated. Take a look at the March 2014 article on Personal injury trusts.