Clinical negligence case 'pay out' tax implication

Pay out is in the form of a Tomlin order or a 'global settlement'

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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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By johngroganjga
08th Jun 2021 15:27

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.

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Replying to johngroganjga:
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By 0151andy
08th Jun 2021 15:43

Hi John and thank you for responding so quickly. Our solicitors (and our QC) have been excellent to date, but I think everyone was sideswiped by the defendant's behavior (refusal to attend a prior settlement meeting and a totally unexpected offer second day of trial). Currently our solicitors seem unclear as to how to issue the payment so there is no tax liability as it would have been paid, if the trial had concluded to a 'win' and a judges ruling was in play, some to our daughter's estate (arriving to us later via probate) and some to us directly for past cares. Strictly speaking those heads of loss no longer apply as the settlement is a 'global' one and we feel this is causing the hesitancy to advice us on tax matters for which they are not strictly qualified. They have told us they can get one of their wills and probate guys to inquire with HMRC technical team but other sources have advised us to avoid that route if at all possible. Ideally we would now prefer to instruct for the entire sum to be released to my wife's account backed with a letter from our solicitors explaining where the money has come from and why - do you deem that a sensible way forward? I will answer any any further questions you may have.
Thanks again John

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By paul.benny
08th Jun 2021 15:52

(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.

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Replying to paul.benny:
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By paul.benny
08th Jun 2021 15:56

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.

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By 0151andy
08th Jun 2021 16:23

I agree that our solicitors have been unhelpful, however the offer to settle was sprung on us 10 minutes before commencement of second day of trial. It was I who asked - well can we even make a counter offer. TBH it felt like an ambush and we negotiated under considerable duress. The advice was - you need to make a decision to settle or continue with trial (which was a very strong case on negligence but losable on one legal point). I think the opportunity for our legal team to advise on the matter was frankly taken away from them. They including our qC stated they have never known anything like it but the defendant ultimately can do what they like.

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By Hugo Fair
08th Jun 2021 16:50

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.

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By 0151andy
08th Jun 2021 17:21

Thank you for your kind comments Hugo - are you placed to offer such expertise ?

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Replying to 0151andy:
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By Hugo Fair
08th Jun 2021 17:56

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?

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By paul.benny
08th Jun 2021 17:06

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.

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By 0151andy
08th Jun 2021 17:23

Thank you Paul - we are seeking such advice to be sure of the situation going forward

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By Duggimon
09th Jun 2021 09:29

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.

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By paul.benny
09th Jun 2021 10:00

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.

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Replying to paul.benny:
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By 0151andy
09th Jun 2021 17:00

Thanks all
Expert advice so far - the settlement is an out of court 'global' one. To attempt to redefine one lump sum under the 2 original heads of loss (which no longer apply as the Judge's ruling makes no reference to them), could to HMRC look very like an attempt to avoid the IHT on the lump sump (40% on the £75K over and above the threshold of £325K). HMRC will reasonably argue that the sum inherited (if we instruct the lump sum to be placed in Emily's estate) of £400K is the taxable amount and we WILL get stung for the IHT. Just transfer the settlement funds to your wife's account (she is the claimant on the Judges ruling). Out of court settlements arising from clinical negligence cases ought not to be liable to tax per se.
Any one disagree ?
Many thanks

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Replying to 0151andy:
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By paul.benny
10th Jun 2021 16:07

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.

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Replying to paul.benny:
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By Tax Dragon
10th Jun 2021 16:41

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.)

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Replying to Tax Dragon:
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By paul.benny
10th Jun 2021 17:29

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.

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By Montrose
09th Jun 2021 19:30

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

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By 0151andy
09th Jun 2021 20:36

Thank you Montrose - I am not at all sure this is a matter of IHT as follows
The subtlety here (at least I think) is due to the changes in the case. In the first instance our daughter was the claimant but she died before the case concluded. Had she won (alive) she would have received damages directly some of which would have paid for the cares we gave over 17 years (24/7 BTW). The case consequently changed to an 'in testate' case wherein my wife (and our daughter's biological mother) became our daughter's 'litigation friend' and had the case been won 'in testate' damages would definitively have been due to our daughter's estate. Some of that estate would have paid our past cares and some would have been our daughter's damages and if we inherited that IHT would have applied but at a nil sum because that part would have been less than £325K.

But ultimately the case was settled 'out of court' with a 'global settlement' (to make us just go away if you like. That money is now just a sum of money in a 'claimant account' (the claimant being my wife) with our solicitor. It doesn't belong to anyone until we (technically specifically my wife) instruct to release it to my wife's account or our daughter's estate. Apparently it's our decision which, on advice.
The final judge's ruling as follows in the 'claimant box'
H____ Lomax Admin. of Estate of E____ Lomax (Deceased)
The consensus to date is 'just release it to your wife's account - tax should not apply on out of court settlements arising from clinical negligence cases'.
My concerns are 1
Neither my wife or I were the injured party - yet the bulk of the settlement would previously have been under the head of loss which is past cares
And 2
I am not so sure at all that our solicitor's advice is sound. That advice is to transfer the funds in to Emily's estate after which the bulk would be released to us for past cares and the remainder (our daughter's damages) would be inherited by us but wouldn't be liable to IHT as it's well under the threshold.
However, the final judge's ruling makes no reference to the original heads of loss and for us to do so may seem arbitrary to HMRC who may see only the global sum of £400K of which £75K would be potentially liable to IHT.
Soz for the length but this thread has divided up the info and I felt it prudent to try and recapture the dilemma.
Many thanks.

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By WhichTyler
10th Jun 2021 11:50

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?

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By Tax Dragon
09th Jun 2021 21:17

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.

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Replying to Tax Dragon:
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By 0151andy
09th Jun 2021 21:41

Down the tax rabbit hole we go !!
Thank you 'tax dragon'. Only ...
The pay-it-to-your-wife-hide-it-under-the-pillow answer
We are not attempting to hide anything I can assure you and I am sure you didn't mean that anyhow but are alerting us moreover to doing it/getting it right, in the sense that if there ought not to be any tax to pay, we don't end up paying any by getting it wrong (and is why I am reaching out for advice). Our solicitor tells us we can instruct to have the funds transferred and deal with tax matter later.
But all your kind advice tells me 'hasten very slowly' and we are seeking out the right paid for expertise as we go.

I must say it's yet another example of the milk of human kindness (of which we have given many pints over our own lifetime to date) that people will come out willing to try and assist others in a time of need.

Thank you all !

Andy Lomax

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