Taxation on insurance compensation interest

MBdriver

Some years ago I claimed on buildings insurance for storm damage to a property I was renting out. The claim included disputed consequential damage, and the dispute dragged on for some years. Eventually I went to the financial ombudsman who agreed with my claim and ordered the insurers to pay up, which they did. They were also ordered to pay me a significant sum of interest for the delay in paying up. This interest was taxed at the usual rate of personal tax which was (as I recall) 20%, and I was provided with a certificate R185 of tax paid. Subsequently I claimed this tax back from HMRC, who refused on the grounds that for the year in question, my personal savings interest already exceeded the £1000 allowance, so that any further interest was taxable.

However, in all my researches, all I can find about the personal savings allowance is that it applies to interest from banks, building societies and the like, and the government web site says explicitly it relates to interest on personal savings.

My question is this: the interest clearly does not equate to earned income, so is not taxable on that basis. But equally it most certainly is not interest eaned on my personal savings. In fact, it is compensation for the delay imposed by the prevarication of the insurers. Surely that is no different in principle to the other compensation I received for the physical damage. So is this interest really liable to tax, and if so, why?

Thank you for your views.

xylophone

https://www.financial-ombudsman.org.uk/consumers/expect/tax

The amount in settlement of claim was not taxable but by the looks of it, the interest was.

eskbanker

MBdriver said:

My question is this: the interest clearly does not equate to earned income, so is not taxable on that basis. But equally it most certainly is not interest eaned on my personal savings. In fact, it is compensation for the delay imposed by the prevarication of the insurers. Surely that is no different in principle to the other compensation I received for the physical damage. So is this interest really liable to tax, and if so, why?

If they'd settled the claim years ago then you'd have had the ability to earn interest on that capital, which would have been taxable in the usual way (even if taxed at 0% when within PSA).  The interest added in the settlement is to compensate for that lack of opportunity, and should effectively put you back in the position you'd have been in if the claim had been paid originally, therefore the interest is taxable.

MBdriver

Many thanks for your replies. Thanks for the link to the FOS info, I hadn't seen that before. I take the point about being able to invest the capital if I'd received it when it should have been paid (2018), but as it happens, in 2018 I did not exceed by a long way the PSA. So I'd have been able to choose how that capital was invested and keep within the PSA allowance. As it was, I had no control over when the capital was repaid, nor any say in how it was 'quasi-invested' - in the insurer's bank account! This hardly counts as 'personal' savings in my view. It's bad enough having to wait years for the money, never mind lose 20% of it due to HMRC's whimsical logic. Seriously miffed 

eskbanker

But conversely, interest will presumably have been added at the statutory rate of 8%, so even after tax deduction, it's probably significantly more than you'd have earned on that capital if you'd had access to it in 2018....

Dazed_and_C0nfused

eskbanker said:

But conversely, interest will presumably have been added at the statutory rate of 8%, so even after tax deduction, it's probably significantly more than you'd have earned on that capital if you'd had access to it in 2018....

Very good point!

MBdriver

eskbanker said:

But conversely, interest will presumably have been added at the statutory rate of 8%, so even after tax deduction, it's probably significantly more than you'd have earned on that capital if you'd had access to it in 2018....

Er... excuse me....  are you trying to make me feel *good* about paying tax .. ??!!!