Tax due on interest

The taxpayer took out a lifetime care policy on the payment of one single lump-sum premium. After ten years the terms of the contract came up for renegotiation.

The insurer told the taxpayer he could either pay a further premium or pay nothing but the payout benefits would be reduced.

Neither option appealed to the taxpayer; he decided to cancel the policy and tried to negotiate a surrender value.

Holders of similar policies were in the same position and the matter was taken up by the Financial Services Authority and the Financial Ombudsman Service.

Eventually an offer was made to the taxpayer which he accepted. His premium was repaid together with interest at a rate of 8%.

The insurance company deducted tax from the interest; the taxpayer claimed overpayment relief on the grounds the payment was one of capital.

HMRC said the payment included an...