Is this 'compensation' taxable?

Is this 'compensation' taxable?

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 Hi everyone

Situation:

1. I applied for a mortgage with the Nationwide including porting my current mortgage to a new property.

2. As part of the new mortgage funds, my current mortgage allows me to 'drawback' overpayments that I have made on the mortgage over the past 6 years - this amounts to £28,000.

3. Intention was that this 'drawback' of £28k would be effected once the additional mortgage funding was drawn down (ie on or shortly before Completion on the property purchase).

What actually happened:

4. Nationwide advances £28,000 drawback on 31st May when no COmpletion date has been set (contracts have not been Exchanged yet).  Hence, my mortgage balance is currently £28k higher than it would be and so interest charged is more than it otherwise would be.

5. Nationwide have agreed that this early transfer was not what I intended and they propose for me to transfer the £28,000 back to my Nationwide bank account (NOT the mortgage account) and they will set up a savings account (paying 2% pa vs 2.5% pa currently suffered on the mortgage (BMR rate)) to hold the £28k and will then compensate me for the difference between received rate (2%) and paid rate (2.5%).

Problem:

I realise the 2% interest receivable on the savings account is taxable (and being a 40% taxpayer it's a reasonable sum, albeit daily interest on the £28k isn't that high).  However, when it comes to the 'compensation', is whatever they pay me for this also taxable?

I suspect it is as it is really just inflated interest they will be paying me.  If so, then I need to submit a compensation claim to them reflecting the 40% tax I will suffer on interest + 'compensation' I will receive VS no tax payable on the interest payable saved had the £28k remained in my mortgage account.

Does this make sense?

Any views/comments appreciated.

Richard

Replies (3)

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Teignmouth
By Paul Scholes
05th Jun 2011 11:38

Not taxable

Can't see that it's taxable as it's compensation and effectively relates to interest charged rather than received.

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By RichardSchollar
06th Jun 2011 09:50

Thank you
Thanks Paul. So that won't require declaring on my tax return.

Should I wish to get them to compensate me for tax suffered then it will simply be on the deposit interest at 2%.

Richard

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By thisistibi
06th Jun 2011 11:01

Also

It will also be interesting to see if the bank deduct basic rate income tax, as that will be a good indicator of what they think it is.

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