Taxation of compensation for delay of payment for apartment buyback

Astronought

Until recently my father lived in a self-contained retirement apartment which he bought many years ago, paying a monthly charge to the home for food, gas, cleaning, etc. When he bought the apartment he was informed that the home would buy it back at the original price minus a sinking fund charge of 1% per year and believed that they would buy it back within a 6 month period from date of notice that he intended to sell. e.g. if it was bought for £200,000 then every year that went by the buy back price would reduce by £2,000, so after 10 years the buy back price would reduce to £180,000.

It's now come clear that the apartment won't be bought back within that timeframe, which is unfortunate but luckily not a disaster, and as compensation he has been offered an additional payment based on a percentage rate per annum on the final net amount repayable to him. i.e. the buy back price minus the home's various costs of selling e.g. their solicitor's fees.
My first thought was that the compensation amount would be treated as some kind of capital gain and so would be taxed via capital gains, which would mean no actual taxation as he will be selling for less than he originally bought the apartment because of the sinking fund.

Is that correct?

I've done some googling but not found anything, so I am most probably completely wrong on how this compensation would be taxed, if indeed it will be taxed. So if anyone could also point me to some webpage that makes it clear then I would be most appreciative.
Many thanks.

Jeremy535897

Was the apartment his main residence throughout his ownership? How is the extra payment described? Is it interest or an adjustment to the price?

Astronought

Yes it was his main residence, bought shortly after my mum died, but myself and my siblings are also down as owning 50% of the property via a trust set up when my mum died and passed her share of their last house together to us. The value of the apartment was very close to the price of their original house so there's not yet been any cgt payable by us siblings.

The extra payment is described as "We will offer the Bank of England base rate (currently 5.25%) + x% thus providing a total interest percentage payable at y% per annum on the net amount repayable" - I've removed the actual interest rate as I assume that's not necessary.

I'm assuming that your question re the description will mean differing answers, in which case it would appear that if necessary then we will want to see whether we can get them to change how they make the compensation.

Jeremy535897

I suspect you will find that hard to achieve. From the description you give, it appears that the amount concerned should be treated as interest income, not a capital gains tax matter.

Astronought

Do I take it that it's the use of the interest rate to calculate the compensation that is the issue here and so it remains taxable as interest even if we get them to change where the extra payment shows in the calculations?

The compensation would have covered the additional costs he is having to cover, but if he then has to pay tax then that's a different matter.

I assume myself and siblings will also need to pay tax on our notional share of the compensation?

sheramber

What proce would he have got if they had bought it within 6 months and how much did he get?

Astronought

sheramber said:

What proce would he have got if they had bought it within 6 months and how much did he get?

He's not yet got anything. The apartment was meant to be bought by the home within six months, but it's likely to be at least 3 months longer than that. The price he will get will be the same whether it had been bought back at the 6 month period or this 9 month period, or indeed any time after that. The compensation is for the delay in him receiving the money, during which time he does not have this apartment to live in or the money which was meant to come from selling it back (when selling back to the home the resident has to vacate the apartment some 3 months before buyback is meant to be paid).

sheramber

So they are paying interest on the delayed payment, not 'compensation' for the delay which , I think, would be a separate negotiation.

Tax is payable on an interest payment.

Jeremy535897

Yes. They describe it as interest, so it is interest.

Astronought

Many thanks for your help on this. I've rung the home up and they say they'll be paying the interest gross so I assume we'll need to fill out tax forms for some of us to pay the due tax as it's owned by both my father and us siblings on a 50/50 basis.

I'm currently outside of self assessment, but for other reasons will need to register for this current tax-year, so where would this particular piece of income go on the form? I assume it's not on the main form as that looks to be just for bank and building society interest, so presumably it's on a supplementary page, possibly the SA105: UK Property page?

Jeremy535897

SA100 Box 2. Despite the heading "interest and dividends from UK banks and building societies", you use this section. That's obvious from what's included in the section, as a UK bank or building society could not pay a foreign dividend.