Revenue Tax Briefing

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Revenue Tax Briefing Issue 44, June 2001

Personal Injuries Exemption of Income

Exemption of income arising from the investment of compensation payments in respect of personal injuries


Section 189 TCA 1997 exempts from tax certain income arising to permanently incapacitated individuals from the investment, in whole or in part, of compensation payments in respect of personal injury claims made by the Courts, or under out-of-court settlements. The exemption only applies where the income in question forms the sole or main income of the individual.

This article considers whether the exemption applies:

  • where investment assets funded by the compensation payment have been realised (perhaps appreciating in value) and reinvested in other assets and
  • where assets have been financed partly by the qualifying compensation payment and partly by borrowings.

Re-investment in other assets

The section specifies that the exemption from income tax applies to income arising from the investment in whole or in part of such payments or of income from such payments.

Income (in this subsection referred to as “the relevant income”) which arises to an individual, to or in respect of whom payments to which this section applies are made, from the investment in whole or in part of such payments or of income from such payments, being income consisting of dividends or other income which but for this section would be chargeable to tax under Schedule C or under Case III, IV (by virtue of section 59 or section 745 or V of Schedule D or under Schedule F, shall be exempt from income tax... (Section 189 (2) TCA 1997)

It is recognised that an asset may over the period of an investment appreciate in value and any re-investment of such funds may also qualify for exemption.

For example, say in 1990 an individual had used ₤200,000 from a qualifying compensation payment to acquire a property the full cost of which came from the compensation payment. The property was let and the rental income generated was covered by the exemption under Section 189 TCA 1997. If the property was sold in the year 2000 for ₤600,000 and all the proceeds (after costs and CGT) were re-invested in another investment property, the exemption would also apply to all the rental income from the new property. In these circumstances the source of income clearly arises from the investment of the compensation funds alone and not from any other source.

Assets financed partly by borrowings

However, where a relevant individual finances the purchase of an asset partly with a qualifying compensation payment and partly with say a loan, then only a portion of the income will qualify for exemption. The income which qualifies is the proportion to which the compensation payment (together with any capital appreciation thereof) used to finance the asset bears to the total funds expended to finance the asset. The exemption can only be given, as the legislation requires, in respect of income arising from the investment of the compensation payments.

Re venue Precedent 391 regarding Section 192 TCA 1997

Revenue Precedent 391 dealt with compensation payments in thalidomide cases. The precedent indicated that where a rental property is financed partly by thalidomide compensation funds and party by a mortgage that the full amount of the rental income is treated as exempt. Revenue have re-examined that precedent and it is now withdrawn. The policy in regard to assets financed by borrowings which is set out above in connection with Section 189 will also now apply to exempt income under Section 192 TCA 1997. Any cases which had availed of precedent 391 can continue to do so, however, any new additional financing by borrowed funds in such cases will not be covered by the relief.

Special Trusts for Permanently Incapacitated Individuals.

Revenue policy as set out above, applies also to the exemption under Section 189A TCA 1997.


The primary purpose of Section 189 is to grant exemption from income tax on the investment of the compensation funds. While it is Revenue’s intention to interpret the section in a broad manner so as, for example, to allow for capital appreciation and not to impose restrictions on the switching of investments, income derived from borrowed funds does not come within the scope of the section.

Finally, it should also be noted that the provisions of Section 189 require that the exempt income (relevant income) be the sole or main income of the individual. ‘Sole or main’ means more than 50%. Where the person claiming the exemption is in receipt of certain payments by the Department of Social, Community and Family Affairs in respect of the same injury or disability which gave rise to the compensation payment those benefits are not taken into account when calculating whether the investment income is the sole or main income of the individual.