Beattie v Secretary of State for Social Security,

Transcription

1 CASE ANALYSIS Income Support Capital to be treated as income - Structured settlement of damages for personal injury - Whether periodical payments that arise from the annuity are to be treated as income Beattie v Secretary of State for Social Security, Court of Appeal [2001] EWCA Civ 498, unreported Introduction Until the 1990s damages at common law were almost always paid by means of a lump sum, never a pension. It did not matter that the compensation was for losses that might be suffered in the future: both the monthly wage that the accident victim may have lost, and the continuing costs of care that would have to be met, were compensated by one large payment. There are many criticisms to be made of this lump sum system. For example, the uncertainty it creates, combined with the enormous responsibility for safeguarding the future that it demands, makes it a very worrying means of obtaining compensation. However, over the past ten years a new form of payment has made limited inroads into the lump sum. Over a hundred very seriously injured people each year now receive part of their compensation in the form of a pension derived from a structured settlement, and over a thousand of these arrangements have been made since they first began in this country. (See generally R. Lewis, Structured Settlements: The Law And Practice (1993) Sweet and Maxwell). This note considers the effect of the regular payments derived from a structure upon entitlement to income support. A structured settlement usually takes the following form. The defendant's insurer, having agreed a lump sum figure, will arrange to convert part of that sum into a series of periodic payments structured to accommodate the claimant s individual needs. The payments can be guaranteed to increase with inflation and to continue for the rest of the claimant s life. To fund this arrangement the liability insurer purchases annuities from a life office, and assigns the benefit of them to the claimant. Unlike the income which arises from the investment of a lump sum, the regular payments are free of tax in the claimant's hands. Originally this was because the Revenue accepted that they could be considered instalments of capital rather than income. Their tax-free status received statutory recognition in the Finance Acts of 1995 and The main advantages of a structured settlement are that it offers greater certainty and security compared to the traditional lump sum. The payments can be index-linked and may end only on the claimant s death. A structure relieves the claimant from the stress of having to invest and be responsible for a lump sum greater than most people will encounter in their lifetime. The arrangement can be especially advantageous financially if there is dispute about the claimant s life expectancy. In addition, it can be a very tax efficient means of securing continuing payment. Structures have proved especially attractive in cases of medical negligence where there are particular incentives for the National Health Service to self-fund the continuing payments without resort to the insurance market.

2 It is with regard to one of the lesser potential advantages with which this note is concerned. About ten years ago, when structures first became prominent, it was argued that if the capital were sheltered in a structure and if the Revenue took the view that the periodic payments consisted of capital and not income, the arrangement could enable the accident victim to retain entitlement to means-tested social security benefits. Many settlements were arranged on this basis. However, in the case under review, the Court of Appeal finds that the recipient of payments under a million pound structured settlement is not entitled to income support. Structured settlements have thus been dealt a blow, and a significant advantage seems to have been removed. It means that, in contrast to tax planning, benefits planning will not feature when the merits of a structure are being considered in future. However, the main advantages of such a form of settlement remain, and it would be unwise for any personal injury practitioner to ignore the potential benefits when settling a claim involving substantial future financial loss. Facts Charles Beattie was only 17 years old when he suffered severe brain damage and was made quadriplegic as a result of a car accident caused by the fault of another. The tragedy which occurred in 1987 changed not only his life but also those of his parents. With the help of nurses, they have looked after him at home for the past ten years. His affairs have been wholly managed by his father, appointed as his Receiver by the Court of Protection. In February 1992 his father made a claim on behalf of Charles for income support. He correctly stated that his son was then receiving no income. As a result income support was duly obtained. However, eight months later Charles was paid a million and a half pounds in damages. Some of this money was used to meet immediate needs, and some was placed in a contingency fund to deal with unexpected future requirements. The remaining two thirds of the award was paid into a structured settlement. This million pound structure produced index-linked payments of more than 5,000 a month, as well as payments of 10,000 every three years to cover the purchase of specialised equipment. In spite of these large sums the father continued to draw income support for his son. He did not supply details of the damages award to the Benefits Agency. This was because he considered, or was advised, that it was not necessary to do so because of the way in which the damages award has been set up. In particular, he believed that the continuing payments under a structure had no effect on his son s entitlement to income support. In 1996, when the Agency found out about the payments, the adjudication officer took a different view. Income support was stopped, although it was agreed not to seek recovery of any benefit overpaid because no wrongful failure to disclose information was involved. The practical effect of the refusal of income support was much greater for Charles than might appear. This was because his entitlement to the means-tested benefit was the passport to several other welfare benefits, including payments from the Independent Living Fund. The case was appealed to the Commissioner, Mr Howell, who found against the claimant in CIS 114/99 (starred decision 56/99). The case was then taken to the Court of Appeal, where the claimant was represented by a leading QC, unlike in the proceedings before the Commissioner where the father had appeared in person. All the professionals advising on the case did so on the basis of a conditional fee

3 agreement, and Frenkel Topping, the Manchester-based forensic accountants responsible for the great majority of structures, were involved in the appeal. The legal background The treatment of damages in relation to social security can be a complex matter, but certain basic rules are clear. Generally if capital exceeds 8,000, or income exceeds the applicable amount, no entitlement to income support exists according to the Income Support (General) Regulations 1987 (S.I No. 1967). However, a particularly generous exception applies where the value of a trust fund is derived from a payment made in consequence of a personal injury. The whole of the capital is then to be disregarded under reg. 46(2) and Sched. 10, para. 12, as discussed in CIS 368/94. Similarly, the capital value of the right to receive structured settlement payments is to be disregarded. Although the capital is disregarded from such personal injury monies, regular payments received by a trust may count as income for benefit purposes when the claimant receives it. Such income, if it exceeds the prescribed amount, may again prevent entitlement to benefit. However, by reg. 42(4)(a)(ii) income support may be retained if the trust makes payments to a third party in respect of other than ordinary living expenses not covered by income support, such as ineligible housing costs or items such as a holiday or personal possessions. By reg. 48(9) if the payments made to the claimant are irregular they may be taken to be capital and not income. Regulation 42 is a difficult provision to interpret but seeks to give the claimant further protection with regard to the income that a personal injury trust may receive. It begins by stating that the claimant is to be treated as possessing income of which he has deprived himself for the purpose of securing entitlement to benefit. But then it makes an exception in favour of personal injury trusts. Broadly it states that the income received by such a trust is not to be taken to be in the possession of the claimant until he acquires it or could be expected to acquire it if an application were made. Finally, and of particular relevance in the present case, reg. 41 states: (1) Any capital payable by instalments which are outstanding shall, if the aggregate exceeds [ 8,000] be treated as income. (2) Any payment received under an annuity shall be treated as income. Decision Pill L.J. delivered the only judgment of the Court of Appeal. It was a short one consisting of seventeen paragraphs. He was in full agreement with the Commissioner that the payments arising under the structured settlement were to be taken as income, and that they were in excess of the prescribed amount and therefore there was no entitlement to income support. Even though tax law may treat the payments as being instalments of capital, they were to be viewed as income for these social security purposes.

4 According to the court, the key provision was reg. 41(2) as set out above. It prescribes, in unqualified terms, that all payments received under an annuity are to be treated as income. It was accepted in argument that the word annuity could be used in relation to the structured payments. However, this concession was not crucial to the decision because the court would have considered the true nature of the transaction no matter what word had been used. As a second possible reason for the decision the court considered that the payments could constitute capital payments by instalments and therefore they would be caught by reg. 42(1). However, the court preferred to treat them as an annuity and to rely on reg. 41(2). Having made this finding, the court agreed with the Commissioner that reg. 42 never came into play. According to the Commissioner, this was because there was no question of the claimant depriving himself of income to secure income support. Counsel had argued that a broader approach should be taken. However, Pill L.J. rejected this. Firstly, he dismissed reg. 42 in one sentence stating that it was concerned only with when a claimant could be treated as possessed of income he does not have, but that does not arise because the claimant does have regular income from the capital sum. Secondly, he rejected the argument that the Receiver could constitute a third party for the purpose of reg. 42(4)(a) as discussed above. Finally, he decided that a detailed review of reg. 42 and its relationship to Sched. 10 was inappropriate. No broad approach was to be taken. Comment The Court of Appeal often shows deference to the expert views of Social Security Commissioners, and it has been reluctant to interfere with their decisions too readily. So it proved in this case. Pill L.J. gave full support to the Commissioner s analysis, without finding it necessary to examine in detail the complex rules involved. Although it was perhaps unfortunate that the claimant did not have representation in the proceedings before the Commissioner, some have always doubted the basis in law upon which continued entitlement to income support was said to rest. Those doubts now have such substance that the claimant and his advisers have agreed not to appeal the case to the House of Lords. Whereas the Court of Appeal did not examine the policy background to the dispute, the Commissioner did devote a paragraph to justifying the legal position. He noted that the father s objective was to ensure that his son s normal living expenses would continue to be met by income support, leaving the damages award to pay for the extra expenses for nursing care and special needs. However, the Commissioner then pointed out that the assessment of damages, including compensation for the loss of earning power, in effect would have included payment for the claimant s own living expenses. He therefore objected to the clever wording of a structure in so far as it seeks to place the responsibility for ordinary living expenses on the general community via the payment of income support, rather than on the tortfeasor. In effect, the objection is that if there were entitlement to benefit there would be a duplication of payment. The inter-relationship of different compensation systems is at the heart of this dispute, the subject being capable of producing complex rules and wide-ranging discussions of policy. (These are examined in detail in R. Lewis, Deducting Benefits From Damages For Personal Injury (Oxford University Press, 1999)).

5 However, the policy objection in this case of avoiding duplication of payment does not get away from the fact that special needs trusts for personal injury exist and that special provision has been made for them in the rules relating to means-tested benefits. Recipients of damages awards are allowed to retain entitlement to income support under some types of arrangement. What is the rationale for this and to what extent have the rules which the personal injury practitioner is expected to apply been clearly thought out and drafted with the due precision? The answers are that the policy has never been discussed in any detail, and the rules have developed haphazardly, with obscure drafting and little inter-relationship. Structured settlement advisers have had to fit structures into these complex rules; no specific provision has been made for the new arrangements. Special needs trusts first developed to benefit children, but only for a limited period of time. Their use was expanded after the Hillsborough tragedy, and with little thought, the legal exemption has been given wider scope. However, there is almost nothing written about them in legal journals or books. Like structures once did, special needs trusts operate in the legal half-light, their existence only being noted at the odd specialist conference. Several hundred such trusts are in existence. Hundreds of thousands would exist if the details were widely known. One unfortunate firm of solicitors is presently being sued for failing to take account of the benefits offered by such a trust. Most practitioners must think: There but for the Grace of God. The effect that Beattie has upon special needs trusts has yet to be determined. At least the case may draw some much needed attention to scope and operation of the income disregard rules in relation to damages for personal injury. If so, the appeal will not all have been in vain. Finally, let us return to structured settlements themselves. It is important to repeat that Beattie removes only a minor advantage of a structured settlement. The many other reasons for stucturing remain in place. The most significant of these were noted by Pill L.J. in his final sentence before he dismissed the appeal: [W]hatever other considerations may apply in some cases, the approach by way of structured settlement adopted in this case does have the merit of providing the claimant with regular and quantifiable payments throughout his life. Richard Lewis, Professor of Law, Cardiff Law School, Cardiff University