Money in trust taxable?

Legacy_user

My fathers friend (80) is in receipt of various benefits due to an accident where she was hit by a car.

She was awarded a sum of money as compensation after claiming from the drivers insurance but she had to place this in some sort of a trust which is administered by my father and I beleive there are restrictions on what she can spend the money on.

So far she has spent some money on making improvements to her home which make live easier for her.

My question is this - the balance of the money is making interest, is this taxable?

Or

If it is taxed at source can she claim it back using an R40 form?

System

The way I understand it is that if the funds were not placed in a trust and were just given straight to her then she would immediately become inelligble for some of the benefits/help she was in receipt of because her savings would have been to high. An agreement was reached via her solicitors and the authorities which meant that she could only use the award to make her life easier. She has replaced her bathroom and installed a shower rather than a bath and she has replaced her kitchen with one which has lower surfaces and a lower oven etc.

I think she was awarded approximately £40,000 and so whatever is left now that she has made the home improvements is accruing interest.

On a sum of money of that size then I would think that any interest made would not exceed the normal tax free allowance of £5225 and so therefore am I right in assuming that, given the trust is separate from her, my father can claim back any tax deducted at source. For the trust, of course, rather than himself.

insured

When income is recieved by a trust it generally has some sort of tax taken from it. eg tax deducted at source from interest or tax credits in the form of a dividend.
The trustees are liable for tax on a trust and use the tax credit or interest when working out the tax they pay.
When the trustees pay income from the trust, they are obliged to deduct tax from that income they pay to the beneficiary and issue a certificate showing the amount of the distribution and the tax credit attatched to it (currently 34%)
The beneficiary can then reclaim the tax which has been deducted by the trustees when completing their own tax return.
I am assuming that this is a discretionary trust which is usually set up when an injured party has potential to claim state benefits.
It is unlikely that she actually was compelled to set up this sort of trust. It is just that the solicitors involved would have taken the benefits aspect into consideration when setting up the trust following the compensation award.
There will be a clause in the trust alllowing the trustees to make appointments of either capital or income to the beneficiary, so the trustees can wind up the trust if it is more beneficial.
I would imagine that there is also a professional trustee here, so that your fathers friend will be able to rely on their knowledge of her circumstances eg benefit position and taxation position when deciding how to invest the trust assets and how to appoint capital. It is unlikely and very unadisable for there to be no professional trustee in this type of trust as the taxation of trusts is now complicated in particular with the positon with regard to non reclaimable dividend tax credits.