The trial ended abruptly when the defendant decided to make an offer. After negotiation the case was settled at £400,000. If the trial hd concluded by way of a 'win' the monies would have been under 2 heads of loss - our daughter's pre-death (she was 17 when she passed away) pain and suffering (approx £365,000) and past cares provided by my wife and I valued at approx £735,000. Because the settlement is technically outside of those heads of loss and is a global settlement, the tax rules are clear as mud (at least to me). We retrieved approx 40% of the total value of the combined heads of loss. Do we instruct the total £400,000 to be transferred and if we do is there any tax liability. Do we instruct that of the £400,000 approx 1/3 is transferred to our daughter's estate for it to come to us (her next of kin) via probate and approx 2/3 is paid directly to ourselves as the past carers - in which case are there any tax liabilities. The general consensus is that an out of court settlement payment re a clinical negligence case is not taxable, but we have had a rotten time, losing our daughter was hugely difficult (especially understanding her hypoxic brain injury after a healthy birth was entirely avoidable and we would prefer to not get stung with an unexpected tax bill if we do something wrong. I hope someone can help us.
Many thanks
Replies (21)
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What are your solicitors’ views on the points you raise? Have they not advised you on what is or is not taxable? That must have been crucial to the consideration of the terms of the settlement.
(edited to reflect response by OP)
It seems to me that for your lawyer to recommend a settlement without being clear on the tax consequences is a touch unhelpful, perhaps even negligent. (and I do mean negligent). At the very least, they should have ensured you took advice before agreeing to the settlement.
And with the caveat that I'm not remotely qualified to advise on probate..
If part of the sum belongs to your late daughter's estate, then surely it should only be released to the executors. And then only disbursed to the beneficiaries on grant of probate.
Although I'm very sorry for your pain and for the shock of the abrupt ending of the trial, if you take a few hours to think about it calmly then I'm sure you'll see that it's worth appointing someone fully qualified in both the legal and the taxation aspects to advise you.
There is no longer anything that you can do to change the past, but every opportunity to find out your future options ... and to do so without unnecessary delay (given that HMRC will seek to be fed one way or another).
A free website, however ameliorating it may prove, is no substitute for professional advice from an expert who can get to grips with all the ins & outs of your situation.
Sorry ... settlement of negligence cases is way outside my areas of comfort.
But as Paul Benny suggests, below, I would hope that your current lawyers (once they too have got over the shock) should be able to point you at suitable advisers even if they cannot provide it themselves.
Also, were you not assisted by any other professionals (insurers, medical experts, etc) who might be both willing to help you and know people with the relevant skill sets to introduce you to?
Ok, so here's my totally non expert assessment:
Filling in the gaps, you and Mrs 0151andy are executors of your daughter's estate and the sole beneficiaries. On that basis, the division of the settlement is somewhat moot - ie there no other party to be concerned with the split.
And unless your daughter had other assets, a split in proportion to the heads of loss will not give rise to IHT on her estate.
I'm not aware of any reason why there should be a tax charge on the settlement per se.
But as Mr Fair says, you do need some proper advice rather than a non-expert making it up as he goes along. Your laywers may be able to help you find advice even if they cannot provide themselves.
For what it's worth, as a similarly non expert general practitioner, I concur entirely with Paul's assessment, but I wouldn't place too much reliance on that.
I can't see anything in what you've said that would render any part of the payment taxable but would need to see the details, and also be suitably qualified/experienced in these matters to offer an opinion of them, which I don't think I am.
Just one more thing picking up on a detail in your first response to johngroganjga.
Before the funds are disbursed, you might be as well to contact your bank, mention the amount that will be incoming and ask whether they need any supporting information. Some banks are more twitchy than others about money-laundering. Checking in advance may reduce the risk of the funds being frozen while you satisfy them of the source.
Andy - This must be the last thing you want having thought that the whole matter was finally drawing to a close.
I think there is consensus here that the damages are not taxable. The potential tax arises from (some of) the monies being paid to your Emily's estate, which then becomes liable to IHT if it exceeds the £325k threshold.
I'm not remotely convinced that HMRC would challenge a 1:2 split - absent any direction in the settlement, attributing it all to Emily's estate is as arbitrary and unsupportable as attributing it all to her mother.
No, Paul, wherever the money goes, the asset that Emily had when she died was the active claim. The value of that claim when she died (and only the value of that claim when she died) determines the IHT on her estate. A settlement for £400k is probably good evidence that the claim was not worth more than that (or else that the advice to accept the offer might not have been best advice).
(And the fact that the £400,000 was to settle claims by Mum and Dad too... well I have no idea of the merits of the different claims. Nor do you. I'm not sure it matters. What matters is - and is only - the value of Emily's claim.)
You're right. I started muddling the IHT and CGT aspects.
As I was going to say before I started confusing myself. Emily's claim was £365k, and so it doesn't take much discounting for risk of not succeeding to reduce the value below the IHT threshold.
Just a general observation-"Free of tax" rarely applies in IHT cases. So if an individual receives a payment free, say, of CGT and subsequently dies, that sum is still part of his/her Estate.
There would need to be a statutory or HMRC concessionary rule to avoid consequential IHT
One for the lawyers but is there any scope for going back to the court (ideally with a proposal) to ask for an order on how it should be allocated under the original heads?
On the IHT side, the £400,000 was not an asset of your daughter's estate. What she had when she died was an active claim. How you value that I don't know, but it seems to me that it's this value (which may be more than £400k but is probably a lot less) that is potentially taxable.
Subsequently, the executors realised an asset (giving up the claim for cash), probably making a gain or loss. That brings CGT into play, if a gain. Chances are (I think it's) ESC D33 (from memory) kicks in and chances are that in consequence there's no CGT charge.
The pay-it-to-your-wife-hide-it-under-the-pillow answer... nah, do it right. IMHO highly unlikely to be tax at the end of the day, from what you have said, but much better to reach that outcome with your cards laid openly in front of HMRC than to cower in a corner and hope they walk on by.