I agree that it should be ignored, but I think that the relevant reg is para
16 (2) of Schedule V:
'(1) An amount equal to the amount of any payment made in consequence of any personal injury to the claimant or, if the claimant has a partner, to the partner.
(2) Where the whole or part of the payment is administered–
(a) by the High Court or the County Court under Rule 21.11(1) of the Civil Procedure Rules 1998, or the Court of Protection, or on behalf of a person where the payment can only be disposed of by order or direction of any such court;
the whole of the amount so administered.'
I don't think that once you have a disregarded sum of capita (200k cannot by any stretch of the imagination be income!) the manner in which it is administered can convert it back into income.
I don't know the facts of your client's case, but I'm not sure it's likely to be caught by either of the exclusions you refer to which to address regular compensation payments which were never capital and so must be regarded as income.
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