Mis-selling compensation - TAX?

[Deleted User]

Further to hays60's question about Barclays and DD's and MarkyMarkD's replies, my mind is working overtime again. We have been offered compensation and "penalty-free" cash in of a policy - A "Profitbuilder House Purchase Scheme" - I know, "PROFITBUILDER" - don't get me started! The policy was taken out in 1993 to mature in 2018 but was a disaster. If we accept the offer, will it be subject to tax?

If so, shouldn't the company pay the tax as well? After all, if the policy was any good, we wouldn't be cashing it in and if it ran for the full 25 years it would not be subject to tax - would it? Their offer of compensation surely admits liability? If the cash compensation is calculated only to put us back where we should have been, that is to say, having used the monthly payments over the last 11 years to pay part of a repayment mortgage, how can we do that if we have to pay tax on the compensation first?

There is no warning in the offer letter that the offer may be subject to tax - is that being honest with us?

Sorry if I am being a bit unclear, but it is after midnight and I gave been on the mortgage calculator sites all night!!

Wild (and increasingly confused!) Rover

MarkyMarkD

There has been some nonsense recently from the Inland Revenue (I think) suggesting that compensation should be subject to tax.

I don't think their argument is very sound.

And if it IS sound, then as you point out, the compensation should be grossed up so that the amount you actuall receive is the amount they have promised. The whole point of the compensation is to restore you to the position you would have been in, had the mis-selling not occurred.

I think the reason that the compensation offers do not refer to this is that the Inland Revenue are flying a kite and it's unlikely that they will succeed in taxing this compensation.

This article http://www.complain2us.com/endowment-policy-news-item.php?newsid=5020 refers to the issue.

It's important to note it's not the whole of the compensation, it's the element which relates to the investment return you would have received on the funds you would have had free if you hadn't bought the endowment. But my understanding of the situation is that, had you not had the endowment, you would have had increased mortgage payments (on a repayment basis) so you wouldn't have had this spare cash to earn interest on. Hence why I think the IR's argument is full of holes.

There's more about this on the IR's website at http://www.inlandrevenue.gov.uk/bulletins/tb72.htm but it's really all a bit dull! They note that mis-selling payments for pensions mis-selling were expressly excluded from taxable income in 1996 by an act of parliament, so if they push it with endowment compensation there is potential for the Government to choose to do something about this in the same manner.

[Deleted User]

Thanks MarkyMarkD!

As always your posts are clear, uncluttered, and helpful - if only I could apply the same tests to my questions!

Do you think that there would be any point in placing a condition on our letter of acceptance of the company's offer to the effect that if the payment was ruled to be taxable, we reserved the right to hunt them down (there I go again!) and pursue them for the tax as well?

Presumably there would be no question of the procceds of the "cash-in" of the policy being taxable as it would have returned a loss in actual cash terms never mind the effects of inflation over the 11 years it has been running?

Thanks again.

WR

dunstonh

The other point on tax is if you surrender the endowment before 10 years have passed (there is slightly shorter period under certain circumstances).

If you do this and you are a higher rate tax payer, then there is a potential higher rate tax liability.

There is another article from the FSA on the interest charge from the inland revenue which may prove useful.
http://www.fsa.gov.uk/consumer/07_MORTGAGES/endowments/mn_endowment_tax.html

[Deleted User]

Thanks DD ;D

That appears to be one less thing to worry about.

All we have to do now is move our mortgage.

We have managed to get a couple of quotes over the phone and been to the online comparison sites - the phone ones have been saying that from tomorrow the rules changes mean that they seemingly will no longer be able to offer "quick quotes" as they have to get more info from potential customers.

MarkyMarkD

Thanks MarkyMarkD!

As always your posts are clear, uncluttered, and helpful - if only I could apply the same tests to my questions!

Praise indeed!  Thanks.

Do you think that there would be any point in placing a condition on our letter of acceptance of the company's offer to the effect that if the payment was ruled to be taxable, we reserved the right to hunt them down (there I go again!) and pursue them for the tax as well?

Presumably there would be no question of the procceds of the "cash-in" of the policy being taxable as it would have returned a loss in actual cash terms never mind the effects of inflation over the 11 years it has been running?

Thanks again.

WR

I don't know whether they would accept such a conditional acceptance of their offer, or whether they are obliged to.  This bit on the FOS website may be pertinent: http://www.financial-ombudsman.org.uk/publications/ombudsman-news/issue-21/your-questions-answered.htm


DD - thanks for your post and link - as that says, the tax issue should rarely arise and if it does apply, the compensation should take account of the tax implications

susan47

I'd just like to add to the above that a few months ago we received 'compensation' from a firm called Century Life for an endowment that was missold to us in 1988 - they agreed it had been the wrong policy for us and said we could have all our premiums refunded, together with lost interest. We got just over £10k back, and they deducted just over £600 in tax. I queried it because the policy was in joint names and I thought only half the policy should be taxed if it had to be taxed at all because I don't pay tax - but they said they couldn't do that. It had to be taxed at 20% and that was that. Do you think that's right?

dunstonh

Seems fine that they tax it at source. Just declare it on your tax return and if you remain below the tax threshold, you should get it back.