Tax on Endowment Compensation Interest

No.

Look at this

I'm aware of Tax Bulletin 72 and have a copy of it, however, I think you may have missed the point of my question.

If I put 10000 in a savings account in my name, the interest will be taxed because I am in full time employment and therefore use up all my tax allowance each year. My wife doesn't earn anything, and so she has her full tax allowance to play with. This means that she can "earn" a lot of interest before she has to pay any tax. It therefore makes sense to ensure that all our savings are in her name (I trust her not to bunk off with it).

What I'm asking is whether I can treat any interest element of whatever award may be made in a similar way and assign it all to my wife so collectively we pay no/little tax on it. Do I need to ensure that the award is made out solely in her name to ensure that the Inland Revenue don't come after me for a slice of tax?

Regards

If you and your wife were joint and equal beneficiaries of the policy and are each entitled to 50% of the surrender proceeds then you are each entitled to, and taxable upon, 50% of the interest. It makes no difference who the cheque is payable to.

I said "No" above.

The point is the compensation and the interest is to both of you jointly.. It doesn't matter where the money is paid. Obviously when a couple have joint cash they can switch things around without HMRC knowing or being able to say who's money it is. In this case the interest is awarded to both of you. It is irrelevant where the money is paid.

Surely the only reason that interest is due to the claimants at all is because it is deemed that the money was due to them earlier than it was in fact paid.

In the following, suppose either that the policy was not joint but his, or that, if joint, the following refers only to his share of the payout.

If he had had the compensation money immediately when it was due, he could have done with it whatever he wanted *from that moment on*, including giving it to his wife so that she could earn interest on it subject to a more favourable rate of tax than he could have.

It is only fair, therefore, that change of beneficial ownership of the payout be capable of being backdated to any time between when it was in fact paid and when it was originally due to be paid. In other words it is perfectly reasonable to assume that all the interest included in the payout could be deemed to be earned by her rather than by him, no matter whose name the policy was in.

Well put Ronald. Exactly the argument and conclusion that was in my mind when I asked the question.

I'm think I'll get them to make the cheque out to my wife.

I think it does.

If we had actually received the mis-selling compensation money on the day that the policy was surrendered, we could have paid it directly into my wifes savings account. Over the year since, any interest would have been accrued by my wife. As she is not in paid employment any interest earned would have fallen within her personal tax allowance for the year, and hence she would have paid no tax on it.

However, if we had paid the money into *my* savings account, I would have paid tax on it at my highest rate as I am in full time employment and so use up all my tax allowance each and every year.

It is therefore not fair treatment to treat us differently now compared to what would have happened had we had the compensation when it was due. Don't you think?

Thanks, and I look forward to Peter's comments on that line of thought.

Don't bother.

To whom the cheque is made payable now, makes no difference to the question of to whom the money is to be taken to have belonged up until now (and therefore whose the interest was). That much at least I am in complete agreement with Peter with.

On the other hand, it can't hurt, you may think, to act in a way least at odds with the impression you want to give. That is, if you maintain the money was hers all along, then asking for it to be made payable to you now could look a little odd. What a "coincidence" that it was "hers" while it was earning interest, yet all of a sudden, when it's actually forthcoming, it's to be yours. Still, you could always transfer it to her as soon as you get it, and in any case why should she not be minded to give it back to you now?

So the issue of the actual cheque payee is really a non-issue.

"Black Hole (@)" wrote

Here's a thought :- The idea of the compensation payment is to put you (ie you+wife!) in the same position now as if you hadn't been missold the endowment. Now I am actually of Ronald's mind on this matter, but let's suppose for a minute that you can't specify that the interest is all your wife's -- in that case, the endowment company need to *increase* the compensation amount to pay you for the extra tax incurred, because if you hadn't been missold the endowment, the money *would* have been in your wife's account for that period of time!

So - ask the endowment company for the extra, so that you'll be "back in the same position" even after tax is paid. Now they have two options (both useful to you) :- (1) Pay up the extra, and you're OK; or (2) Show that you *can*, legally, specify that the interest is your wife's and therefore not pay up.

If (2), then you'll have your answer, and the endowment company had to do all the research to show it!

We are talking about the law. We are not talking about what is fair and reasonable.

If you got some money and you earned interest on it would you say that you could have put the money in your wife's account and she wouldn't have had to pay tax on the interest so you shouldn't either?

If that were indeed the case then I would have no gripe with that. However, I'm smart enough to know that that would be a stupid thing to do, and that the smart thing to do would be to transfer it to my wife for her to put in her savings account and so pay no tax.

This is what we have done in the past, so it's not a case of what I might have done, it's a case of what I definitely would have done. *I* have no savings. My wife has the lot (such as it is).

Even though I don't normally like to stick my head up above the parapet with HM Revenue & Customs, I think in this case I will write to them and determine their position. If they say that I must treat some/all of the interest as mine, and therefore I lose some of it due taxation, I will have to raise this issue with the Halifax before I accept any offer they make.

On this, at least, we are both in agreement.

Black Hole, the whole point is that you did not actually receive the money when it was due, you did not pay it into your wife's account and she did not earn any interest on it. You cannot mould tax law around what might have happened; you have to stick to the facts. The interest is payable to you jointly and therefore taxable on you jointly. HMRC may agree an alternative treatment by concession (or one of their call centre operatives might do so) but that does not make it correct.

"Peter Saxton" wrote

That's not really a very comparable situation. Try:-

If someone conned some money out of a couple, and then a court ruled that they should pay the couple back an amount which put them back into the same situation that they would have been in (had they not been hoodwinked) -- and the conman delayed payment of the required amount (paying interest for the period of delay), then...

If the conman had paid the couple on time, then the money would have been placed straight into the wife's savings a/c...

BUT, the conman didn't pay the couple on time. The reality is that the conman paid them late and had to pay EACH ONE OF THEM compensatory interest. You cannot then pretend only one of them earned the interest for tax purposes!

BUT - you CAN expect that the compensation, less the correct tax, properly puts them back into the same position that they would have been in had it been paid on time.

That's the point!

No you can't. You have to allocate the interest to who was deprived of the money and then you have to tax the interest on that basis.