Periodical payments: tax exemption: payments under the original court order or settlement agreement
Main condition for tax exemption
A primary condition for periodical payments of personal injury damages to be exemptfrom income tax is that they are made under
- an order of a UK court made in reliance of section 2 of the Damages Act 1996, or
- an order of a court outside the UK which is similar to a UK order made in reliance of section 2 of the Damages Act 1996, or
- an agreement which settles a claim or action for damages for personal injury or which provides for payments on account of damages pending full settlement, or
- a Motor Insurers Bureau (MIB) undertaking in relation to a claim or action in respect of personal injury.
The link to the original settlement is crucial and the tax exemption is only availablewhen the settlement is structured at time of settlement by agreement or order of thecourt. It does not apply where the injured person or his or her representatives take alump sum and have a free hand to subsequently invest that lump sum as they please, forinstance by buying an annuity.
Court orders and other relevant documentation
When a caseworker is faced with a claim that periodical payments are exempt under ITTOIA05/S731and there is any doubt whether the exemption applies then he or she should obtaina copy of the court order, agreement or other relevant documentation governing theprovision of the periodical payments. In most UK cases there will be a court order even ifboth sides are agreed on the terms of the settlement. This is because there is arequirement to obtain a consent order from the court in cases where the injured person isa minor or incapacitated which, given the nature of these settlements, is often the case.
An order or agreement may not explicitly refer to an order in reliance of the Damages Act1996, particularly if it is from a foreign court. However, it should be clear whether itawards, or settles a claim or action for, damages for personal injury which consist whollyor partly of periodical payments.
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