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Personal injury trusts

Compensation awards often hit the headlines – we have seen over recent years how the amounts being awarded have increased and it is common to see six or even seven figure sums mentioned.

Often, these awards are placed in a personal injury trust. The use of such a trust allows the money to be ignored when assessing the entitlement of the beneficiary to means-tested benefits and local authority funded care, providing it is established within 52 weeks of the award being granted.


The role of a trustee is important for any trust, however the beneficiaries of these trusts will rely on these funds for many years and may not be able to comprehend the sums involved and the cost of the care required. Whilst a financial award cannot reverse the suffering these people and their families go through, any financial settlement should at least be sufficient to provide care and medical treatment, funding needs for the rest of their lives.

 

Managing such a large sum of money may appear daunting and a challenge for any trustee which is why this is left to a professional trustee in many instances. In addition, there are practical advantages in that the beneficiary may be very young or mentally incapable and would benefit from trustees handling their financial affairs. 

The use of a personal injury trust not only helps with means-tested benefits but the tax position of these arrangements. Any trust income or gains are assessed on the beneficiary as if it is their own.

 
There are various tax allowances and benefits that are available so the investment vehicles used need to maximise the use of these as they can have a direct impact on the net returns.


The use of an investment bond can provide an ideal solution for trustees, and the choice between a UK-based or international provider, such as those issued by Isle of Man or Irish providers, can add flexibility and different tax treatments to onshore variants.


There is a strong argument for the assets in a personal injury trust to use a variety of wrappers to maximise the tax efficiency. Whilst the choice of wrapper will depend on the beneficiary’s tax position and the assets used, investment bonds should play an important role in the overall strategy of a personal injury trust.

 

Read the full article on page 18 of the winter issue Technical Eye here

Written by Neil Jones, Tax and Wealth Specialist, Canada Life.

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Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

Canada Life International Limited and CLI Institutional Limited are Isle of Man registered companies authorised and regulated by the Isle of Man Financial Services Authority.

Canada Life International Assurance (Ireland) DAC is authorised and regulated by the Central Bank of Ireland.

Stonehaven UK Limited and MGM Advantage Life Limited, trading as Canada Life, are subsidiaries of The Canada Life Group (U.K.) Limited. Stonehaven UK Ltd is authorised and regulated by the Financial Conduct Authority. MGM Advantage Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.