Policy paper

Windrush Compensation Scheme Payments: Relief from Income Tax, Capital Gains Tax and Inheritance Tax

Updated 11 March 2020

Who is likely to be affected

Individuals and personal representatives who receive or have received payments in connection with or under the Windrush Compensation Scheme.

General description of the measure

This measure introduces Income Tax, Inheritance Tax and Capital Gains Tax exemptions for payments made under the Windrush Compensation Scheme.

The legislation also includes a provision for a new power to relieve payments from Income Tax, Inheritance Tax and Capital Gains Tax where appropriate for any necessary future compensation schemes, by making regulations in a statutory instrument.

Policy objective

These changes give certainty to claimants and personal representatives acting on behalf of the estate of a claimant, that payments made in connection with or under the Windrush Compensation Scheme will not give rise to charges to Income Tax, Inheritance Tax or Capital Gains Tax.

As in the case of the Windrush Compensation Scheme, schemes run by, or on behalf of, governments can sometimes be set up and payments start to be made before it is possible for legislation to be introduced through the Finance Bill process. The new power will allow the government to act more quickly to give clarity and certainty about the tax treatment of payments if this is necessary in the future.

Background to the measure

The Windrush Compensation Scheme compensates individuals who have suffered loss in connection with being unable to demonstrate their lawful status in the United Kingdom. It was launched by the Home Office on 3 April 2019.

The compensation covers fees for unsuccessful immigration applications, loss of income from and denial of access to the labour market (including self-employment), denial of access to social security benefits, denial of access to services, impact on daily life, and incorrect detention, removal and ability to return to the UK.

While compensation payments are often made entirely free of tax there are circumstances where Income Tax, Inheritance Tax or Capital Gains Tax may apply. For example, compensation for the fees relating to unsuccessful immigration applications or impact on normal daily life will not be subject to Income Tax whereas payments made to reinstate taxable social security benefits or in respect of a terminated employment could be taxable without this exemption.

Payments for loss of income will be calculated by reference to the amount that would have been received after tax and National Insurance contributions ensuring that recipients are in no better position than if they had received money at the time.

All types of payments could have been subject to Inheritance Tax or Capital Gains Tax if they exceed the relevant tax-free thresholds without this exemption.

Detailed proposal

Operative date

This measure will take effect in relation to payments made in connection with or under the Windrush Compensation Scheme on or after 3 April 2019, and in relation to Inheritance Tax in respect of someone who dies on or after that date.

Current law

The Income Tax (Earnings and Pensions) Act 2003 imposes charges to Income Tax on employment income, pension income and social security income. The Income Tax (Trading and Other Income) Act 2005 charges Income Tax on the profits of a trade, profession or vocation, which can include receipts in compensation for loss of profits.

There are existing exemptions for payments under compensation schemes in Income Tax (Trading and Other Income) Act 2005, such as the Criminal Injuries Compensation Scheme. In addition there are exemptions for pension income from Equitable Life Payment schemes in Income Tax (Earnings and Pensions) Act 2003.

The Taxation of Chargeable Gains Act 1992 imposes Capital Gains Tax on gains that arise on the disposal of assets which are not chargeable to Income Tax. However, compensation or damages received by an individual for any wrong or injury suffered in his person or in his profession or vocation is exempt from Capital Gains Tax.

Section 4 of the Inheritance Tax Act 1984 imposes the charge to Inheritance Tax for transfers on death. Compensation payments, or the right to receive such compensation, would be treated as part of the deceased’s estate and would be subject to Inheritance Tax on their death. There are reliefs already in existence with respect to payments to victims of persecution during the Second World War era (Section 153ZA Inheritance Tax Act 1984).

Proposed revisions

Legislation will be introduced in the Finance Bill 2020 to relieve payments made in connection with or under the Windrush Compensation Scheme from Income Tax, Inheritance Tax and Capital Gains Tax. The changes take effect in relation to payments made in connection with or under the Windrush Compensation Scheme on or after 3 April 2019, and in relation to Inheritance Tax in respect of someone who dies on or after that date.

This measure will also introduce a new power in legislation alongside the Windrush Schedule to extend the definition of ‘qualifying compensation payment’ if necessary. This is restricted to compensation payments made by, or on behalf of, the UK government, devolved administrations, governments of other countries, and local government compensation schemes, which the government can exercise by making regulations in a statutory instrument, subject to negative resolution procedure. This is to allow the government to act quickly to clarify the tax treatment of any necessary future compensation schemes.

Summary of impacts

Exchequer impact (£m)

2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023	2023 to 2024	2024 to 2025
negligible	-5	-5	negligible	negligible	negligible

The figures for these measures are set out in Table 2.1 of Budget 2020 as Windrush: tax exemption for compensation payments and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2020.

Economic impact

This measure is not expected to have any significant economic impacts.

Impact on individuals, households and families

This measure will affect individuals in receipt of payments in connection with or under the Windrush Compensation Scheme by ensuring these payments are not subject to Income Tax, Inheritance Tax and Capital Gains Tax.

There is no impact on family formation, stability or breakdown from the changes to the tax treatment of these payments.

Equalities impacts

The Windrush Compensation Scheme has been set up by Home Office following a consultation. The Home Office have published an Impact Assessment on the Windrush Compensation Scheme.

This measure ensures clarity and certainty that Windrush compensation payments are free of tax. Due consideration has been given to the equalities impacts of the tax exemption of these payments from Income Tax, Inheritance Tax and Capital Gains Tax.

This measure affects individuals receiving payments in connection with or under the Windrush Compensation Scheme. The policy applies equally to those affected by the provisions of the Scheme and in receipt of the relevant payments.

Impact on business including civil society organisations

This measure is expected to have no impact on businesses or civil society organisations. It only affects individuals in receipt of payments in connection with or under the Windrush Compensation Scheme.

Operational impact (£m) (HMRC or other)

Relieving compensation payments from Income Tax, Inheritance Tax and Capital Gains Tax will create no additional costs for HMRC.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure will be kept under review through communications with affected taxpayer groups.

Further advice

If you have any questions about this change, email: incometax.structure@hmrc.gov.uk.