Exempt interest round-up

Sunday, 01 September 2013
Amanda Edwards journeys through ISAs, injury awards and pension mis-selling to reveal the key exceptions.

The best known exemption from income tax on interest is where interest arises in a tax-efficient saving plan, such as an individual savings plan (ISA or junior ISA)1

However, there are other statutory exemptions from income tax where interest arises. The main exceptions are set out in Chapter 6 of Part 9 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005)2 and include:

  • Interest paid under repayment supplements (s749): no liability arises on interest paid by HMRC where there are repayments of income tax, surcharges or penalties. There are similar provisions for exemption on repayments of capital gains tax, stamp duty and inheritance tax.
  • Interest under employee share schemes (s752).
  • Interest on repayment of overpaid student loans (s753).
  • Interest on unpaid relevant contributions to a pension scheme (s753A – in the event of late payment of employer contributions).
  • Interest on foreign currency securities (s754).
  • Interest on certain deposits of victims of Nazi persecution (s756A).
  • Certain interest and royalty payments (s757).

Personal injury awards

Another payment benefiting from exemption is interest on personal injury awards (under s751).

Interest on damages within s751 represents compensation for the delay between the injury and the award of damages. The exemption does not extend to interest arising between the date the judgment is given and the date of payment.

Example

Carlos, a cycle courier, sustained severe injuries in 2006 after being hit by a van. Carlos took legal action against the van driver and was awarded damages by the court on 10 December 2007. Under the terms of the settlement, he received GBP21,300, representing damages of GBP20,000 plus GBP1,300 interest from the date of the injury to 10 December 2007, the date of the award.

The personal injury exemption does not extend to interest arising between the date the judgment is given and the date of payment

Carlos did not actually receive a cheque for the award from the van driver’s insurers until 10 June 2008. He received an additional GBP32 with the cheque, representing interest for the six-month delay in payment of the damages (from 10 December 2007 to 10 June 2008).

The GBP1,300 interest included in the damages award is exempt from tax by virtue of s751. Carlos should not include this on his 2008–09 self-assessment tax return. But the GBP32 interest relating to the six-month period between the date of the damages award and payment of the money will need to be shown as untaxed interest on his 2008–09 tax return. If Carlos does not normally complete a self-assessment return, he would need to tell HMRC about the six months’ untaxed interest.

On the other hand, a person being sued for damages might pay money into court. This ‘deposit’ with the court may earn interest, and that interest is taxable income of the defendant. It remains so even though it may eventually be paid to the claimant as part of the settlement of the claim.

Interest on damages for personal injury awarded by a foreign court is also exempt from tax, provided the interest is exempt from tax in the country in which the award is made3.

Pension mis-selling

Similar treatment is afforded to payments of interest in relation to compensation for mis-selling of pensions, with payments exempt from both income tax and capital gains tax under s148 of the Finance Act 1996 if certain conditions are met. The exemption of interest from income tax applies only to interest up to the date of the agreement or award, and not to interest that arises between the agreement or award and actual payment. This treatment does not extend to compensation for mis-selling of investments generally.

  • 1. Or its precursor, the personal equity plan, available until 5 April 1999
  • 2.  Statutory references are to the Income Tax (Trading and Other Income) Act 2005 unless otherwise indicated
  • 3. Section 751(1)(c)
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Amanda Edwards

Amanda Edwards TEP is an Associate in the Private Client and Tax department at Boodle Hatfield LLP.

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