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I have a new client who has an interesting past and a possible problem. She was married till about 1995 when her husband died. Up to 1991-92 they were living abroad and had around £125,000 in a bank account in the Far East. At no time since has any bank interest been returned either up to the date of death of the husband or by his wife from the date of his death up to now.
I have a new client who has an interesting past and a possible problem. She was married till about 1995 when her husband died. Up to 1991-92 they were living abroad and had around £125,000 in a bank account in the Far East. At no time since has any bank interest been returned either up to the date of death of the husband or by his wife from the date of his death up to now.
The interesting point is that the account was administered by her son; he was an employee in the HSBC bank where the account was held. He received all correspondence in respect of the account and, as neither my client nor her late husband ever received any correspondence, they were not aware of any income. They trusted their son implicitly. However, he systematically raided the account until there was nothing left. This was only discovered when he tried to commit suicide and left a note explaining what had gone on.
My client has since sued the bank for negligence and has been offered £75,000 plus legal costs of around £90,000. This is less than the original amount held on deposit and considerably less than the amount that could have accrued with the addition of interest. The bank's view is that the £125,000 has been used and has not been lost by them. However, as the son was an employee, it accepts some blame, hence the offer of compensation.
What are the tax consequences, if any, relating to the above? On the one hand, as my client will actually have less funds than originally held, there is no 'profit' and so all the money could come back to the United Kingdom without tax consequences. On the other, as the original £125,000 has been 'used', would the £90,000 compensation be classed as income? Would the legal expenses claimed and awarded be taxable? Any assistance would be greatly appreciated.
(Query T15,857) – Confucius.
From what 'Confucius' says I am assuming that the couple concerned were non-domicilied, and, as stated, only became resident and ordinarily resident in the United Kingdom from 1992-93. Therefore taking the rules as per section 65(4) and (5), Taxes Act 1988 and Chapter 6.25 of the Inland Revenue booklet IR20, there is only a liability to income tax on investment income arising outside the United Kingdom if it has been received in the United Kingdom. Therefore as no interest from the HSBC bank was received in, or remitted to the United Kingdom, there is no United Kingdom tax liability.
The case Zim Properties Ltd v Proctor [1985] STC 90, which forms the basis for Inland Revenue Extra-statutory Concession D33 is relevant here. The company sued its solicitors for negligence. Part 12 of the Extra-statutory Concession 'Personal compensation or damages' which relates to section 51(2), Taxation of Chargeable Gains Act 1992, explains that exemption from capital gains tax only relates to 'sums obtained by way of compensation or damages for any wrong or injury suffered by an individual in his person' and 'The words "in his person" are to be read in distinction to "in his finances"…'. Therefore section 51(2) does not apply in this case.
However, as the compensation relates to (not completely) replacing a capital item, then there will be no capital gains implications, and, as above, it will not be classed as anything to do with income.
Under paragraph 13024 of the Revenue Capital Gains Manual 'Legal costs incurred in pursing a Zim style right are allowable where they satisfy the requirement in section 38(1)(b), Taxation of Chargeable Gains Act 1992 that the expenditure has been incurred in "establishing, preserving or defending" the claimant's right to an asset'. Therefore they would not be a taxable item. – Goldstone.
As the interest arises from a source that is outside the United Kingdom any interest arising on the account, if it is assessable at all, will be assessable under Case V of Schedule D.
Certain individuals are assessed under Case V on the remittance basis rather than on an arising basis. These are individuals who are domiciled outside the United Kingdom, and United Kingdom and Commonwealth citizens and citizens of the Republic of Ireland who are not ordinarily resident in the United Kingdom. If the client (and her deceased husband) fell into any of these categories for years up to and including 1991-92 they will escape assessment for those years. If, as seems likely, the client was domiciled and resident in the United Kingdom for later years there could well be a liability to tax.
Dewar v Commissioners of Inland Revenue 19 TC 561 establishes the principle that a person entitled to receive interest, but who does not receive it (either directly or by an agent on his behalf) will not be taxable in respect of the interest even though the failure to receive the interest results from his not taking any action to claim it. Following the decision in Dunmore v McGowan [1978] STC 217 however, the taxpayer will remain taxable in respect of interest credited to his bank account, even where the interest cannot be immediately enjoyed by him, if the interest so inures for his benefit that he had effectively received the interest. The test will be whether for any year interest was due on the account and credited to it. If it was, the client will be assessable on the interest. The fact that the interest was stolen by a third party, entitled to operate the account, can have no relevance in arriving at the amount assessable.
The compensation paid by the bank is equally irrelevant in arriving at the amounts assessable. The compensation merely seems to recognise that the client has a claim against the bank, in part, for the stolen interest and capital.
It is possible that if the client had been unable to recover any of the capital or interest from the bank, the Revenue may have looked sympathetically at a request that assessments on interest should not be raised. If, as seems to be the case, an amount equal to at least the interest has been recovered, the Revenue will want the tax on the interest.
The Revenue may also wish to know why the source was not declared on tax returns at the proper time, and take appropriate action if the amounts warrant it. This may range from a simple request for interest and penalties, in addition to tax on the interest, to a full enquiry into the client's affairs for all years from 1991-92 to date. The Revenue's ability to recover tax, interest and penalties in respect of the deceased husband's share of the interest may well be limited by section 40, Taxes Management Act 1970. – Hayloft.
I have a new client who has an interesting past and a possible problem. She was married till about 1995 when her husband died. Up to 1991-92 they were living abroad and had around £125,000 in a bank account in the Far East. At no time since has any bank interest been returned either up to the date of death of the husband or by his wife from the date of his death up to now.
The interesting point is that the account was administered by her son; he was an employee in the HSBC bank where the account was held. He received all correspondence in respect of the account and, as neither my client nor her late husband ever received any correspondence, they were not aware of any income. They trusted their son implicitly. However, he systematically raided the account until there was nothing left. This was only discovered when he tried to commit suicide and left a note explaining what had gone on.
My client has since sued the bank for negligence and has been offered £75,000 plus legal costs of around £90,000. This is less than the original amount held on deposit and considerably less than the amount that could have accrued with the addition of interest. The bank's view is that the £125,000 has been used and has not been lost by them. However, as the son was an employee, it accepts some blame, hence the offer of compensation.
What are the tax consequences, if any, relating to the above? On the one hand, as my client will actually have less funds than originally held, there is no 'profit' and so all the money could come back to the United Kingdom without tax consequences. On the other, as the original £125,000 has been 'used', would the £90,000 compensation be classed as income? Would the legal expenses claimed and awarded be taxable? Any assistance would be greatly appreciated.
(Query T15,857) – Confucius.
From what 'Confucius' says I am assuming that the couple concerned were non-domicilied, and, as stated, only became resident and ordinarily resident in the United Kingdom from 1992-93. Therefore taking the rules as per section 65(4) and (5), Taxes Act 1988 and Chapter 6.25 of the Inland Revenue booklet IR20, there is only a liability to income tax on investment income arising outside the United Kingdom if it has been received in the United Kingdom. Therefore as no interest from the HSBC bank was received in, or remitted to the United Kingdom, there is no United Kingdom tax liability.
The case Zim Properties Ltd v Proctor [1985] STC 90, which forms the basis for Inland Revenue Extra-statutory Concession D33 is relevant here. The company sued its solicitors for negligence. Part 12 of the Extra-statutory Concession 'Personal compensation or damages' which relates to section 51(2), Taxation of Chargeable Gains Act 1992, explains that exemption from capital gains tax only relates to 'sums obtained by way of compensation or damages for any wrong or injury suffered by an individual in his person' and 'The words "in his person" are to be read in distinction to "in his finances"…'. Therefore section 51(2) does not apply in this case.
However, as the compensation relates to (not completely) replacing a capital item, then there will be no capital gains implications, and, as above, it will not be classed as anything to do with income.
Under paragraph 13024 of the Revenue Capital Gains Manual 'Legal costs incurred in pursing a Zim style right are allowable where they satisfy the requirement in section 38(1)(b), Taxation of Chargeable Gains Act 1992 that the expenditure has been incurred in "establishing, preserving or defending" the claimant's right to an asset'. Therefore they would not be a taxable item. – Goldstone.
As the interest arises from a source that is outside the United Kingdom any interest arising on the account, if it is assessable at all, will be assessable under Case V of Schedule D.
Certain individuals are assessed under Case V on the remittance basis rather than on an arising basis. These are individuals who are domiciled outside the United Kingdom, and United Kingdom and Commonwealth citizens and citizens of the Republic of Ireland who are not ordinarily resident in the United Kingdom. If the client (and her deceased husband) fell into any of these categories for years up to and including 1991-92 they will escape assessment for those years. If, as seems likely, the client was domiciled and resident in the United Kingdom for later years there could well be a liability to tax.
Dewar v Commissioners of Inland Revenue 19 TC 561 establishes the principle that a person entitled to receive interest, but who does not receive it (either directly or by an agent on his behalf) will not be taxable in respect of the interest even though the failure to receive the interest results from his not taking any action to claim it. Following the decision in Dunmore v McGowan [1978] STC 217 however, the taxpayer will remain taxable in respect of interest credited to his bank account, even where the interest cannot be immediately enjoyed by him, if the interest so inures for his benefit that he had effectively received the interest. The test will be whether for any year interest was due on the account and credited to it. If it was, the client will be assessable on the interest. The fact that the interest was stolen by a third party, entitled to operate the account, can have no relevance in arriving at the amount assessable.
The compensation paid by the bank is equally irrelevant in arriving at the amounts assessable. The compensation merely seems to recognise that the client has a claim against the bank, in part, for the stolen interest and capital.
It is possible that if the client had been unable to recover any of the capital or interest from the bank, the Revenue may have looked sympathetically at a request that assessments on interest should not be raised. If, as seems to be the case, an amount equal to at least the interest has been recovered, the Revenue will want the tax on the interest.
The Revenue may also wish to know why the source was not declared on tax returns at the proper time, and take appropriate action if the amounts warrant it. This may range from a simple request for interest and penalties, in addition to tax on the interest, to a full enquiry into the client's affairs for all years from 1991-92 to date. The Revenue's ability to recover tax, interest and penalties in respect of the deceased husband's share of the interest may well be limited by section 40, Taxes Management Act 1970. – Hayloft.
