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Readers' forum : Banking on it

14 February 2017
Issue: 4587 / Categories: Forum & Feedback

Is a payment from a bank taxable interest or tax-free compensation?

My client had a small business bank loan to lend to a company in which she owns 50% of the shares. She claimed a deduction for the interest paid over the loan’s two-year life.

It was all paid off in January 2014 but in October 2015 out of the blue she received a letter from the bank with an apology and a cheque for £778. The letter says: ‘Consideration will need to be given as to whether this refund of interest should be reported on your tax return. HMRC’s published guidance says that where tax relief has previously been claimed in your tax return for interest payments as an allowable business deduction then any refund will normally be taxable.’ Fair enough but is this a ‘refund of interest’? The letter adds: ‘Although we provided information about your right to repay your loan early we didn’t remind...

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