IHT & Estate Planning
Last Updated: 6 Apr 24 5 min read
1. What is a Personal Injury Trust
2. Disregard for Means Tested Benefits
4. Personal Injury Trust Taxation
5. Absolute
Personal Injury Trust is the name given to trusts which are usually set up by solicitors from payments as a result of an accident, injury or malpractice.
Personal injury trust is the name given to trusts which are usually set up by solicitors from payments as a result of an accident, injury or malpractice. The funds normally are paid directly via the solicitor into a suitable trust. They are normally either absolute or discretionary in nature and the settlor of the trust is normally the injured party. The solicitor is usually responsible for drafting a suitable trust. For the avoidance of doubt, the term “Personal Injury Trust” has no statutory basis. If at all possible, the trust should be set up before the individual receives the funds otherwise the funds will be treated as belonging to the individual before the trust was established.
The first payment received following a personal injury is disregarded for 52 weeks when assessing entitlement to means tested benefits and services. This disregard does not apply to any later payments. After 52 weeks, it is then taken into consideration for means tested benefit, assessment, purposes. The 52 week rule is a temporary period of grace, not a time limit as such and so a Personal Injury Trust can even be set up after this time period has elapsed. If it is set up after 52 weeks, the client’s income and capital for the period from the 52 week point until the trust is set up will be taken into account when the individual is being assessed for means-tested benefits.
The main consideration of the trust is to protect any benefits so that the capital and income of the trust is not taken into consideration. It protects clients who are in receipt of means tested benefits.
The trustees can pay for any capital items that are required by the settlor i.e. a specially adapted home, specialist equipment, replacement household goods etc. The trustees can pay for holidays for the injured party and carers but they will not normally remit “income” directly to the beneficiary’s bank account so as not to interfere with means tested benefits.
If the individual is eligible, the trustees may be able to claim special tax treatment in the form of a “vulnerable person election” and the trust will be treated and taxed as a “vulnerable trust”. The relevant form is VPE1. For the avoidance of doubt, this is not required for a bare trust.
For further information please see “Trusts for Disabled Persons"
Where the settlor is the only person capable of benefitting, then the gift into trust is not an occasion of charge given that nothing is leaving the estate and the trust property simply forms part of the death estate. Similarly, where the settlor ‘self-settles’ into a ‘disabled trust’ (S89 IHTA 1984) as referenced above, then again the property has not left the estate for IHT purposes.
Any income tax and capital gains tax will be assessed on the settlor of the absolute trust at their own tax rates. This means the settlor can utilise their personal allowance, savings rate, personal savings allowance and the dividend nil rate. They can also utilise their own capital gains tax annual exempt amount.
On the death of the settlor the value of the trust will form part of the estate and the executors will act in accordance with the will or intestacy rules.
Under a Discretionary trust, a gift creates a chargeable lifetime transfer (CLT) if the disabled trust conditions for IHT are not met. In that event, a gift may attract an entry charge if the value of a gift when added to any other CLTs made in the previous 7 years exceeds the settlor’s current nil rate band. In broad terms, there may therefore be a tax disincentive for settling funds in excess of £325,000.
Any income tax will be initially assessed on the trustees at the trustee rate of tax. However, as this is a “settlor interested” trust, the income will also be assessed on the settlor who will get credit for the tax paid to set against his/her own income tax liability.
There are no settlor interested rules for capital gains tax. Any tax due will be levied at the trustee rate of tax over the annual exempt amount applicable to trusts. This amounts to half of the annual exempt amount for individuals divided by the number of trusts created in the settlor’s lifetime up to a maximum of 5.
Discretionary trusts may also be subject to periodic charges every 10 years and exit charges which are explained here.
On the death of the settlor the trustees will administer the trust fund in accordance with the trust deed. The settlor may create a letter of wishes to give them guidance on whom they want to benefit from the trust after their death.
Any investments made will be in the name of the trustees who are responsible for the assets within the trust.
Normally the trustees have wide investment powers and can invest in any asset that a prudent person would invest in which includes Bonds, OEICs and bank accounts.
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