Income tax liability of compensation for mis-sold interest swap

The taxpayer carried on a property rental business. In 2005 he took out a bank loan to refinance a loan he had with another bank and to fund the purchase of a property. A year later he took out a further loan to fund another property acquisition. The loans carried interest at a floating rate and as a condition of the second loan the taxpayer took out interest rate protection in the form of a swap.

In 2013 as a result of a review by the Financial Services Authority which found high street banks had adopted poor practices in selling interest rate hedging products such as the swap the bank offered the taxpayer redress; this comprised two elements – basic redress and interest.

The taxpayer argued the entire compensation was a capital receipt. HMRC said the sum was taxable as income. It considered the basic redress...