When a geologist went missing in Angola in 1998 and was never heard from again, he was presumed to have been killed.

Eventually, four years after his disappearance, his life assurance provider agreed to pay the £100,000 policy proceeds to his next of kin, his parents. They put the money in an account in their son’s name. By that time, ‘interest’ of more than £36,000 had accrued and HM Revenue and Customs (HMRC) assessed the receipt to Income Tax.

The question was whether tax was payable on the interest and, if so, was the interest income of the late man’s estate or of the recipients?

The man’s parents argued that the tax legislation which exempts interest on payments ‘where a person is awarded damages with respect to either personal injury or death, and a court under specific statutory provisions awards a payment of interest on those damages’ exempted the additional payment from charge.

The First-tier Tribunal (FTT) rejected this argument, accepting instead HMRC’s argument that the interest was not in respect of a damages award and that payments under a life assurance policy were different in kind from those covered by the exemption.

The recipients also argued that the payment was not one of interest, but rather one of compensation or, alternatively, that it was a capital receipt, not an income receipt. One aspect of the argument hinged on the fact that the payment was at the discretion of the insurance company.

The FTT rejected those arguments also, holding that the payment was interest and taxable as income.

These conclusions were supported on appeal by the Upper Tribunal (UT). However, the UT did conclude that HMRC had raised its tax assessment on the wrong people. The accrued interest was payable to the man’s estate, not to his parents.