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Exempt interest round up

The most commonly known exemption from income tax on interest is where interest arises in a tax efficient saving plan, such as an individual savings plan (ISA, Junior ISA).

There are a number of other statutory exemptions from income tax where interest arises. The main exemptions are set out in Chapter 6 of Part 9 ITTOIA 2005 and include:

1. Interest paid under repayment supplements (section 749) - 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.

2. Interest under employee share schemes (section 752).

3. Interest on repayment of overpaid student loans (section 753).

4. Interest on unpaid relevant contributions to a pension scheme (section 753A - in the event of late payment of employer contributions).

5. Interest on foreign currency securities (section 754).

6. Interest on certain deposits of victims of Nazi persecution (section 756A).

7. Certain interest and royalty payments (section 757).

Interest on personal injury awards

Other payments benefiting from exemptions that may also be encountered are the exemptions for interest on personal injury awards (under section 751).

Interest on damages within section 751 represents compensation for the delay between the injury and the award of damages. The exemption does not extend to interest arising in the period between the date 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 £21,300, representing damages of £20,000 plus £1,300 interest from the date of the injury to 10 December 2007, the date of the award.

Carlos did not actually receive a cheque for the award from the van driver's insurers until 10 June 2008. He received an additional £32 with the cheque, representing interest for the six-month delay in payment of the damages (i.e. from 10 December 2007 to 10 June 2008).
The £1,300 interest included in the damages award is exempt from tax by virtue of section 751. Carlos should not include this on his 2008-09 self-assessment tax return. But the £32 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 such interest is taxable income of the defendant. This is the case, even though it may eventually be paid over 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 made.

Pension mis-selling - exemption for interest
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 section 148 FA 1996 provided certain conditions are met. The exemption of interest from income tax only applies to interest up to the date of the agreement or award and not interest that arises between the agreement or award and actual payment. This treatment does not extend to compensation for mis-selling of investments generally.

This article first appeared in the STEP Journal in September 2013.

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