Hypotethical question?

theguzman

Myself and a friend were recently discussing compensation culture and the sort of payouts in the insurance industry and legal settlements etc. Which leads me to two unusual questions?

E.g. Person A is assaulted by Person B, suffering some type of traumatic injury, he seeks damages for e.g. €100k, person B agrees and the case is settled out of court, on the steps if you will. Does the plantiff person A then receive all this money and is it taxable? Person B maybe liable for both legal costs or else both parties agree to pay their own fees.

Different Scenario,

Person A is suing his parents for emotional trauma resulting from his alleged traumatic and abusive childhood, claiming parental neglect etc. Person A is seeking huge damages e.g. €1m from his wealthy parents.

The Parents admit liability and agree to settle the case (again out of court) and decide to handover the family's second home and farm plus €1m in cash to their son, the case is thus settled and plaintiff is satisfied with compensation award.

Person A now finds himself in possession of most of his parents assets bar the family home. As their child would he have to pay CAT inheritance tax on this since he would never have inherited it had he not taken the lawsuit case against his parents?

Just two examples but something which came about of a recent conversation about people getting insurance payouts, compensation for injury and abuse claims.

Many people receive huge sums, disabled children at birth have won upto €10 from the HSE, instances of child abuse etc where people got large sums and in assault cases where wealthy individuals had to pay off their victims. Car insurance from severe injuries and fatal crashes.

E.g. a mans wife was killed in a car accident caused by a third party, if he was awarded €2m would that be taxable?

ohnonotgmail

this is the revenue commissioners take on it https://www.revenue.ie/en/life-events-and-personal-circumstances/illness-and-injury/personal-injury-compensation-payments/index.aspx#:~:text=If%20you%20receive%20a%20personal,exempt%20from%20tax%20on%20include%3A&text=personal%20injury%20payments%20arising%20from,the%20Criminal%20Injuries%20Compensation%20Tribunal

Peregrinus

On the legal costs issue, the settlement agreement will usually deal with the question of whether one party is to pay the other party's legal costs, or to pay a contribution towards them. If the settlement agreement is silent about this, then each party bears their own legal costs.

On the tax issue, at the risk of oversimplifying awards of general damages for pain, suffering, inconvenience etc are usually tax-free, as are awards to reimburse you for costs or expenses you have suffered (e.g. medical bills, the cost of replacing damaged goods).

But some awards may be taxable. For example, if you get damages for lost earnings or lost profit, the earnings or profit would have been taxable if you had earned them, and so the damages you get in substitution are taxable.

Given that such a wide range of damages is tax-free, there is a danger of "confected" legal claims between connected parties to enable payments or asset transfers to be dressed up as damages and so be free of tax. The Revenue will scrutinise these cases very carefully.

(I recall a case in the UK a good few years back, where:

- tabloid newspaper published salacious claims about celeb;

- celeb sued for defamation;

- claim was settled on basis that newspaper paid lump sum to celeb, and published a piece by the celeb setting out his version of the naughty story.

The revenue were all over it; they took the view that the net effect was that the the celeb had been paid for writing a sensational article for the newspaper, and in their view the payment was subject to income tax as earnings. The revenue issued an assessment, the celeb disputed it. Sadly, the matter never went to court, so I don't know how it was resolved.)