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