SAIM2330 - Interest: exemptions: personal injury damages
Interest included in damages for personal injury
Interest on damages (including, in Scotland, solatium) in respect of personal injuries or death included in an award by order of a court in any part of the United Kingdom is exempted from tax by ITTOIA05/S751. Such interest may be granted for the period, or any part of the period, from the date the cause of action arose to the date of the award. ‘Personal injuries’ for this purpose includes any disease or impairment of a person’s physical or mental condition.
Interest on damages awarded in corresponding circumstances by a foreign court is also exempt from tax, provided the interest is exempt from tax in the country in which the award is made. For years before 2005-06, this extension was concessionary, under ESC/A30. It was made statutory by ITTOIA05/S751(1)(c).
The exemption conferred by ITTOIA/S751 extends to the interest element in:-
- a payment into Court for which judgement is never given, and
- an out of court settlement.
It does not extend to interest on the sum awarded for the period between the date judgement is given and the date of payment.
‘Interest on damages’ in ITTOIA05/S751 means any element of the damages award that represents compensation for the delay between the occurrence of the personal injury and the award of damages. See the guidance at SAIM2090 on determining whether or not a lump sum that someone receives contains an interest element.
The exemption does not cover any interest that may be earned if the damages award is subsequently invested, or any capital gain that arises on such investments.
Example
Alice, a leaflet deliverer, sustained severe injuries on 1 July 2015 after being attacked by a householder’s dog. She took legal action against the owner of the dog, and on 10 November 2016, she was awarded damages by the Court for personal injury. The judgement states that she is to receive £41,362, representing damages of £40,000 plus £1,362 representing interest from 1 July 2016 to 10 November 2017.
Alice did not actually receive any money until 10 April 2018, when she received a cheque for £41,982 from the dog owner’s insurers. The additional £620 represents interest for the six-month delay in payment of the damages. Alice opens a savings account with a bank and deposits the £41,982. In 2017-18, she earns net interest of £675 on the bank deposit.
The £1,362 interest included in the damages award is exempted from tax by ITTOIA05/S751, and Alice does not need to show it on her 2018-19 self assessment return. But the £620 interest relating to the period between the date of the damages award and payment of the money will need to be shown on her 2018-19 return, as will the £675 bank interest. If Alice does not normally complete a self assessment return, she would need to tell HMRC about the untaxed interest.
Interest on money paid into Court
A person being sued for damages may pay money into Court. Such a ‘deposit’ with the Court may earn interest. This interest is taxable income of the defendant, even though it may eventually be paid over to the plaintiff as part of the settlement of the award.