Personal Injury Compensation Trust - Taxation ???

0779mike

Is anyone familiar with these ?

I am trying to get info from several banks but phone waiting times are dreadful and front line call handlers are not familiar with this specialist area.

A friend needs to put £60k into one of these accounts which would allow them to invest the money in shares, funds or ETFs. It maybe a bank or possibly a stockbroker ( e.g A J Bell )

Or maybe a bank account and a stockbroker account is needed ?

These are very specialised accounts and few banks offer them. 

Any info or phone numbers welcome.

Mike

OldMusicGuy

A friend of mine has one. The solicitor that pursued their compensation claim set up the trust for them, I am not sure what bank they use. AFAIK you need to get a trust setup first, has your friend done this? This means you have to have a trust agreement and nominated trustees who will manage the trust. Once this is done, most banks will allow the trustees to open an account for the trust. 

You may find this helpful: https://www.headway.org.uk/media/2782/a-guide-to-personal-injury-trusts-factsheet.pdf

If it's in a trust, the person can't manage it themselves, the trustees have to do this. The person can of course just keep the money outside of a trust and do what they want with it but then it is not shielded from any benefit entitlement calculations.

The solicitors that my friend used have a financial advice arm to their company and they are trustees and manage the funds in the account for my friend. Not cheap either.

0779mike

I have found only 2 banks that offer a PI Comp trust, Metro, and Barclays who we will probably go with.

One issue that has come up during my research is taxation of the trust, this looks a little complex.  Does anyone know what type of trust this be, is a "Bare Trust" or one of the many, other types ?  And how will it be taxed ?

We can pick our investments in the investment account as "accumuation" so would I be correct in thinking that would give capital growth but zero income in the eyes of HMRC ?

OldMusicGuy

If you read the link I posted above, it explains the trust types  Bare trusts are the most common, I would imagine you may use more specialized trusts if the person lacks capacity.

See here for taxation info: https://www.gov.uk/trusts-taxes/trusts-and-income-tax

Albermarle

We can pick our investments in the investment account as "accumuation" so would I be correct in thinking that would give capital growth but zero income in the eyes of HMRC ?

Many investment funds are offered in two forms 

Income - This means dividends are paid out of the fund ( the timing and amounts will vary from fund to fund )

Accumulation - This means that dividends are automatically reinvested into the fund .

Normally ( but I have no idea about PI trusts ) HMRC treat the dividends the same in either case .

0779mike

The lady suffered a severe physical injury but is perfectly competent. 

I understand investments sufficiently to guide her to suitable passive funds but different types of trust have their capital gains and income taxed differently.  I hope to join her on a call and ask the solicitor a raft of questions as they are charging £1250 just to create the trust.  

OldMusicGuy

Someone needs to draw up the trust documents and set up the trust. Unless you can do that for your friend, they will need to pay. But my friend paid £700 plus VAT for their trust to be set up (this was 2 years ago), so you might want to shop around. The solicitor should be able to explain the trust options and what they are recommending.

Also, be wary of the solicitor then offering to become a trustee and manage the funds. That's what my friend did. My friend "trusted" the solicitor because they got a good compensation settlement so was happy to use their financial advice arm (they didn't pressure my friend). But my friend is now paying 1% per annum plus other fees for disappointing performance. I advised them not to do this and to at least shop around but they went with the "simple" option. They are regretting it now. 

Obviously if you are going to manage the funds you will need to be a trustee which will come with responsibilities. 

xylophone

If it's in a trust, the person can't manage it themselves, the trustees have to do this.

But it seems the injured person can be one of the Trustees. See

https://www.clarkewillmott.com/legal-services/accident-and-injury-claims/serious-injury-solicitors/personal-injury-trusts/

The trust document appoints at least two trustees (you can be one and the other could be a family member or friend) and sets out guidance on how the money is to be managed by your trustees.

but different types of trust have their capital gains and income taxed differently. 

Presumably it will be set up as an Absolute  (Bare)Trust?

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/personal-injury-trust/

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.

https://www.cfglaw.co.uk/faq-category/how-is-a-personal-injury-trust-taxed

How is a Personal Injury Trust taxed?

With a Bare Trust, income and capital gains are treated as the Beneficiary's for tax purposes. There is no requirement to separately register the Personal Injury Trust with HMRC. An annual tax return might need to be filed however, if the Beneficiary’s usual personal allowances have been utilised.

There are no immediate or periodic tax charges, which apply to other types of Trust.

Albermarle

OP Just to say that with 'only ' £60K , it is unlikely that any Capital Gains or Dividend Tax would be payable, as the amounts should be able to be kept inside the Dividend nil rate and the Capital Gains exempt amount .
However this would need some input/management to make sure of this .