THALIDOMIDE PAYMENTS MADE TAX FREE

15th July 2004

Paymaster General Dawn Primarolo today laid new legislation to make payments from the Thalidomide Trust to victims of Thalidomide tax-free, a move which will be worth £1 million per year in lower tax and increased tax credits for recipients of the payments.

Since 1974, the Thalidomide Trust has been subject to the same rules that govern payments from all ‘discretionary trusts’.  Up until now some payments from the Trust have counted towards the victims’ ‘taxable income’, increasing their tax bills and also reducing their level of entitlement to tax credits.

Following consultation with the Inland Revenue the Trust will change the way it makes its payments to victims so that they can be classified as “periodical” and fall within the scope of legislation governing “structured settlements”. This allows the Treasury to make use of a hitherto-unused provision of the Income and Corporation Taxes Act 1988 to designate the “periodical payments” to Thalidomide victims as exempt from income tax.

The new legislation will take effect from 5th August 2004, after which payments from the Trust to victims will be discounted as “income” for the purposes of calculating the victims’ income tax liabilities and their entitlement to tax credits.

The total value of the change to Thalidomide victims in terms of lower income tax and additional tax credits will be around £1 million per year. For individual victims, it could be worth up to £60 a week, £240 a month, or £3,120 per year.

Commenting on the changes, Dawn Primarolo said:

"I am delighted that, working closely with Thalidomide Trust, we have been able to find this solution, which will bring real financial benefits to those affected by the Thalidomide disaster. Today's announcement demonstrates our continued commitment to helping the most vulnerable in society, and acting where we can to ensure a fair tax system. The hundreds of individuals who have campaigned for this change and worked hard to achieve it deserve our praise and thanks today."

Details:

The Thalidomide Trust was set up in 1973 to support the victims of Thalidomide. The initial trust funds were provided by way of a donation from Distillers (later Guinness, now Diageo) who made the Thalidomide Drug.

Donations to the trust by Distillers/Guinness/Diageo have been made as follows:

	Under a 1974 agreement, Distillers agreed to pay out £14m under deed of covenant at £2m per year for 7 years, later adjusted to £19m in 1978 when more victims came to light;
	In May 1995, Guinness agreed to enter into a further ‘entirely voluntary and charitable’ covenant to pay an additional £2.5m per year for a period of 14 years (the Trust was running out of funds at this time); and
	In June 2000, Diageo agreed to extend the additional contributions until 2022 and index link them from April 2000.

The beneficiaries are taxed on the payments at their marginal rate of tax with credit given for the 40 per cent tax deducted by the trustees. So if the beneficiary is a higher rate taxpayer they have no further tax to pay. However if, as is more usual, they are a non-taxpayer or basic / standard rate taxpayer they can reclaim some or all of the tax deducted.

Since the 1970s, successive governments have given a total of £12.8 million to the Thalidomide Trust. £5.8 million was given in 1974 and 1978 (around the time the Trust was created) to offset the tax due on payments to beneficiaries.

In 1996, £7m was paid as a “one-off” and “final” contribution in recognition of what the government of the day called “the unique and tragic circumstances which surround the Thalidomide disaster”.

Notes to Editors

1. The Treasury has today laid the ‘Thalidomide Children’s Trust (Application of Section 329AA of the Income and Corporation Taxes Act 1988) Order 2004’. It comes into effect on 5th August 2004.