Compensation for a personal injury is not a chargeable gain and court interest on the award is tax free, but once the money is invested its interest and growth are taxed in the ordinary way, usually as the injured person’s own income and gains. For inheritance tax the fund normally stays in the injured person’s estate. The real reason for a personal injury trust is benefits: capital held in one is ignored for Universal Credit and Housing Benefit for as long as it stays in the trust.

What is a personal injury trust and why do people set one up?

A personal injury trust is a trust that holds money paid to someone because they were injured. The award might come from a court judgment, an out of court settlement, the Criminal Injuries Compensation Scheme or an insurer. The injured person is normally the person the trust is there to benefit, and usually also the person who sets it up.

The tax position is fairly neutral. The trust exists because means tested benefits look at the claimant’s capital. Without a trust, a large award would take most people well above the capital limits. With a trust, the benefit rules disregard it.

  • Universal Credit. Regulation 75(4) of the Universal Credit Regulations 2013 says that where a personal injury award is held in trust, trust capital derived from it is ignored when working out the claimant’s capital, and income from the trust is ignored as unearned income.
  • Housing Benefit. Paragraph 14 of Schedule 6 to the Housing Benefit Regulations 2006 ignores the value of a trust fund derived from a payment made because of a personal injury to the claimant or their partner, and the value of the right to receive payments from it.

Regulation 75 also ignores regular payments made under a court order or agreement, payments under an annuity bought with the award, and sums administered by a court on the person’s behalf.

How long can compensation sit outside a trust?

There is a grace period, but it is short and it does not restart.

  • For Universal Credit, regulation 75(6) ignores an award that is not in trust, not used to buy an annuity and not otherwise disposed of only if it was paid to the person within the past 12 months.
  • For Housing Benefit, paragraph 14A of Schedule 6 ignores the payment for 52 weeks beginning with the day the claimant first receives any payment for that injury. The disregard does not apply to later payments for the same injury and stops for any part the claimant no longer has, including money spent on buying an asset.

So an interim payment received early in a claim can start the clock long before the final settlement arrives. Setting up the trust when the first payment is received avoids that problem.

Is the compensation itself taxable?

No. Section 51(2) of the Taxation of Chargeable Gains Act 1992 says sums obtained as compensation or damages for any wrong or injury suffered by an individual in their person are not chargeable gains.

Interest is split into two kinds. Section 751 of the Income Tax (Trading and Other Income) Act 2005 exempts interest on damages for personal injury or death included in a court award, and the interest element of an out of court settlement or payment into court. HMRC’s Savings and Investment Manual at SAIM2330 explains that this covers interest for the period before the award, not interest for any delay between judgment and payment, and that it does not cover any interest earned or capital gain made once the damages are invested.

Periodical payments are treated differently. Section 731 exempts periodical payments made under a court order relying on section 2 of the Damages Act 1996, or under an agreement settling a personal injury claim. Section 733 extends that exemption to a trustee who receives the payment on trust for the injured person, provided that while the injured person is alive they are the only person who may benefit.

How are income and gains inside the trust taxed?

That depends on how the trust is drafted.

  • Bare trust. Where the trust gives the injured person an absolute right to capital and income, it is a bare trust. HMRC’s manual at TSEM1563 says the beneficiary of a bare trust is taxable on the trust income and gains, and must include them in any tax return or repayment claim. The person keeps their own Personal Allowance of £12,570 for 2026 to 2027 and their own capital gains annual exempt amount of £3,000.
  • Trust set up by the injured person for their own benefit. GOV.UK treats a trust as settlor interested where the settlor can benefit, and the settlor is then responsible for income tax on the trust income even if it is not paid out. The result is still that the income is taxed as the injured person’s.
  • Vulnerable beneficiary treatment. Where the injured person is disabled within the tax definition, trustees of a non bare trust can elect for the vulnerable beneficiary rules. GOV.UK notes that the special income tax treatment is not available where the person who set up the trust can benefit from the income, although the capital gains tax treatment can still apply. The trust’s annual exempt amount is £3,000 instead of £1,500 for 2026 to 2027 where the beneficiary is vulnerable. See vulnerable beneficiary trusts.

Income from the trust is ignored for Universal Credit, but it is not ignored for tax. The tax side and the benefits side need to be thought about separately.

How does inheritance tax treat the fund?

Usually the fund is treated as the injured person’s own property.

  • HMRC guidance on trusts and inheritance tax says that where a beneficiary is entitled to both the income and the assets of a bare trust, both count as part of their estate when they die and must be included on form IHT400.
  • For trusts set up for a disabled person, section 89B of the Inheritance Tax Act 1984 lists the kinds of disabled person’s interest. HMRC’s manual at IHTM42805 says a disabled person can set up a trust for themselves without a charge to inheritance tax, because they are treated as keeping an interest in possession. That treatment also covers someone who settles property while they have a condition that can reasonably be expected to lead to disability, if they can show HMRC evidence of it. The property then counts as part of their estate.

On death the fund is added to the rest of the estate. Inheritance tax is charged at 40% on the part above the £325,000 threshold, subject to the usual exemptions. Families are sometimes surprised that money kept outside the benefits system is still fully in the estate.

Does a personal injury trust have to be registered?

Often not. The Trust Registration Service manual at TRSM23030 confirms that trusts arising from a personal injury payment are excluded from registration under paragraph 18 of Schedule 3A to the Money Laundering Regulations 2017. The condition is that the fund must be disregarded from capital under the Income Support (General) Regulations 1987. TRSM23080 separately excludes trusts where a disabled person is the beneficiary, during that person’s lifetime. A trust that later becomes liable to tax, or holds money that does not come from the injury award, should be checked again; see the Trust Registration Service.

How does this work in practice?

Illustration only. Sam is injured in a road accident and claims Universal Credit. In May 2026 Sam receives an interim payment of £20,000, and in February 2027 a final settlement of £180,000 that includes £6,000 of court interest. Sam sets up a bare personal injury trust in March 2027 and pays both sums into it. The trustees invest the fund and earn £7,000 of interest in the next tax year.

  • The £180,000 of damages is not a chargeable gain, and the £6,000 of interest included in the award is exempt under section 751.
  • The trust capital and income are ignored for Universal Credit under regulation 75(4). The interim payment was also covered by the 12 month disregard until it went into the trust.
  • The £7,000 of later interest is Sam’s taxable savings income because the trust is bare. Sam reports it through Self Assessment or a repayment claim.
  • If Sam dies, the fund is part of Sam’s estate for inheritance tax.

What mistakes come up most often?

  • Waiting too long. The Housing Benefit disregard runs from the first payment for the injury, not from the final settlement.
  • Mixing funds. Paying other savings or a partner’s money into the trust weakens the link between the trust capital and the injury award, which is what the disregards rely on.
  • Assuming the trust makes income tax free. Only the award itself and the court interest are exempt. Bank interest, dividends and gains on investments are taxed. See bare trusts and tax for how the beneficiary reports them.
  • Forgetting the vulnerable beneficiary deadline. Where the trust is not bare and the election would help, it has its own time limit.
  • Confusing benefits with tax. Some state benefits are taxable whatever the trust position. See taxable and non taxable state benefits.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.