How to tax deferred interest

How to tax deferred interest arising on an unregulated investment

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UK individual client has invested money in an unregulated investment.  A company has issued them with loan notes with a "guaranteed" very high interest rate.  The company then buys property in Germany and uses German tax breaks to refurbish.  There is an annual interest calculation schedule set for my client  but there is no interest paid to them till the end of year 5 when it is paid all in one lump sum.  No german or UK tax is deducted.  We are currently in year 2.  Should I tax on the self assessment return a) nothing, b) year 2 deferred receipt, c) amend the year 1 tax return to tax it all and then adjust later perhaps if the investment fails d) something completely different. 

Any thoughts gratefully received.

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paddle steamer
By DJKL
29th Nov 2016 11:47

In year two is the interest calculated on the original loan note sum or on the original loan sum plus the year one interest calculation, i.e. is there compounding where it might be argued the interest was "paid" each year by being added to the original loan note, increasing same?

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Replying to DJKL:
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By nelfi
02nd Jan 2017 22:47

sorry for the delay. It is compounded. Ie: added to the loan amount and subsequent interest is then calculated on this larger figure.

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