With over £1billion paid out to date in respect of missold interest rate hedging products by major banks, we consider below how these receipts should be treated for tax purposes.
What we are looking at?
Redress payments being made to individuals or companies in respect of a missold product which offered protection against interest rate rises in conjunction with a business loan.
Are redress payments subject to Tax?
Where tax relief has previously been claimed for the payments made, under general principles, any repayment of such premiums should be taxable in the period received. In addition, any interest received in respect of the redress payment should also be treated as taxable.
For individuals in receipt of a redress payment, the bank may have already deducted tax at the basic rate (i.e. 20%) on any interest element. This can, however, be credited against your tax liability in the period the redress payment is received.
Reducing the tax charge
There may be an opportunity to reduce the tax charge where the compensation payment is expected to be received in 2014/15, and- as an individual you are pushed into the higher eate tax band; or
- as a company you breach the large company upper limit and will become subject to quarterly instalment payments as a result of the compensation payment
In these cases the tax charge could potentially be reduced if a deduction is not claimed on the 2013/14 tax return for any premiums paid in that period. This would have the effect of spreading the redress payment and could take the individual / company out of the higher tax band/quarterly instalments or reduce the tax paid at the higher rate.
If you would like any further information or advice in respect of this issue, please get in touch with Nick Haines, Tax Partner on 01242 237661.