Staking a claim

The payment protection insurance (PPI) scandal has been with us for several years now, and a deadline for new claims has been set by the Financial Conduct Authority (FCA) of 29 August 2019. In the meantime, we are bombarded on an almost daily basis through the media with exhortations to claim some of the ‘billions of pounds’ currently unclaimed. A significant proportion of this money may be unclaimed because the account-holders have died, and those dealing with their estate are unaware of the potential to claim, or just don’t believe they have enough information to substantiate a claim.

But what do your personal representatives (PRs) need to do if they know there has been a claim by the deceased, or, indeed, if they decide to pursue a claim themselves?

Claims settled during lifetime

Many PPI claims have already been settled, and compensation paid to the claimant during their lifetime. If this has happened, there is probably nothing further to be done by the PRs, whether executors or administrators.

It should be noted that PPI compensation may be made up of three elements:

1. return of the premiums paid by the claimant
2. interest on those premiums to the date the compensation is paid
3. if interest had been charged on the premiums (usually where PPI is linked to a credit card), return of the interest calculated to have been overcharged as a result of the premiums being added to the account.

The interest (2) is subject to income tax when received by the claimant, but not the returned premiums (1) or returned interest paid (3). It is therefore important for PRs to verify that, for payments received during their lifetime, the claimant has properly disclosed to HM Revenue & Customs (HMRC) the interest received. It should be noted that there appears to be no consistency between the firms paying compensation as to whether they deduct income tax from the interest (2). Some do, some don’t.

While PPI claims may have been settled during the deceased’s lifetime, any individual could have claims against a number of financial institutions

It is important for PRs to appreciate that the amounts paid in compensation on average total £2,750, but can range from modest sums (under £1,000) to as much as £80,000. Where the aggregated amounts are significant (say, in excess of £10,000, and certainly at the top end of the range) they may be of particular interest to HMRC. If any income tax is payable, or refundable in respect of the PPI claim, that will usually be dealt with as a part of the finalisation of the deceased’s personal income tax affairs (in respect of the tax year in which the income was received, regardless of the period over which it is deemed to have accrued).

For claims settled before death, the benefit of any monies received will be generally reflected within the estate, and no separate disclosure should be necessary for inheritance tax (IHT) purposes.

PRs should also recognise that while PPI claims may have been settled during the deceased’s lifetime, any individual could have claims against a number of financial institutions (FIs). Accordingly, the settlement of some claims cannot necessarily be taken to indicate that there are no other claims that might have been already initiated or are still to be identified. Whether it might be appropriate to contact one of the many firms offering PPI claims services, though, must be a matter for the individual’s PRs to consider.

Claims outstanding at death

A claim outstanding at death refers to a claim which has been made but not settled by the time of death. This is irrespective of whether the amount is subject to negotiation or nothing further has happened since the claim was made.

The claim will be a chose in action and will consist of the same three elements identified above.

When disclosing the value of the claim for IHT purposes, it will be necessary to establish the amount of interest (2) that had accrued to the date of death, as this will be part of the value upon which IHT will be assessed. Also, as settlement of the claim was outstanding as at the date of death, it may be possible to negotiate with HMRC a discount of the combined elements for IHT purposes, to take into account the delay in receipt of the monies. In the event, if a claim is dismissed without any payment being made, the value for IHT (if previously disclosed) should be reduced to nil.

When the PRs receive the settlement funds, any discount for IHT purposes allowed on the return of premiums and interest paid (1 and 3) could be treated by HMRC as a gain for capital gains tax (CGT) purposes. The interest (2) will be income of the estate for the tax year in which it is actually received (regardless of the period over which it is deemed to have accrued). Again, it should be noted that there appears to be no consistency between the firms paying compensation as to whether they deduct income tax from the interest (2).

Claims made after death

Where a claim is initiated by PRs (or, post-death, by any other party for the benefit of the estate), the value as at the date of death may well be discounted to take into account the uncertainty at that time as to whether the claim will be accepted.

If the claim is dismissed without any payment being made, the value for IHT will be nil and there should be no need to disclose the failed claim to HMRC.

Successful claims will include the three elements identified above.

If a claim is dismissed without any payment being made, the value for IHT should be reduced to nil

As discussed above, when PRs receive the settlement funds, any discount for IHT purposes allowed on the return of premiums (1) and interest paid (3) could be treated by HMRC as a gain for CGT purposes. The interest (2) will be income of the estate for the tax year in which it is actually received (regardless of the period over which it is deemed to have accrued).

A review of the deceased’s papers may reveal if they have been sold any PPI, although, as many claims may relate to PPI from many years ago, this might only produce results if the deceased hoarded their paperwork. A more effective route might be the use of one of the firms offering PPI claims services, many of which seem only to need name, addresses over the last few years and date of birth to be able to track down outstanding entitlements to compensation.

Claims assented to a beneficiary before settlement

As identified above, where PPI compensation is paid to PRs, the refund of premiums (1) and any interest paid refunded (3) could be subject to CGT to the extent that it was discounted for IHT; and the interest (2) is subject to income tax in their hands. If the benefit of the claim is appropriated or assented to a beneficiary, that beneficiary may be able to use their personal tax allowances to reduce the potential tax liabilities.

It may be argued that as the benefit of the claim is a chose in action and following an assignment, the compensation is paid to the beneficiary or beneficiaries (and not to the estate), the payment may be capital in the beneficiary’s hands and liable only to CGT (if at all) and not income tax – at least to the extent of the value as at the date of death (if not the full value received by the beneficiary). However, this argument has yet to be tested with HMRC.

To the extent that any part of the proceeds of a claim are subject to income tax in a beneficiary’s hands, it does not qualify as ‘savings income’ and cannot, therefore, be within the annual savings allowance to which a beneficiary might be entitled.

Costs of claims

Where a claim is pursued directly with an FI, such institution should not charge to deal with the claim.

However, where a claim is pursued through a third party, such as one of the many firms offering a PPI claims service, those firms will normally charge commission, usually as a percentage (many around the 25 per cent mark) of any amount recovered, plus VAT. While many will work on ‘no win, no fee’ arrangements, it will be necessary to read the small print to correctly identify the extent to which any liability may arise even if no valid PPI claim is identified.

Looking at the position where a PPI claims service is engaged, any commission paid pre-death will already be reflected in a reduced account balance, and so no further deduction against IHT would be allowed.

If the deceased has initiated the claim, they will have signed a contract entitling the claims firm to commission on the monies recovered. As this contract will pre-date death, any commission paid under its terms will normally be allowable against IHT as at the date of death, even though it will not be paid until after death.

If a claim is initiated post-death, whether by the PRs or by a third party, any commission paid, or other costs of pursuing the claim, will not normally be deductible for IHT purposes.

How to make a PPI claim

The first place to look is the FCA webpage dedicated to PPI claims.

Where it is believed, or just suspected, that the deceased might have an entitlement to compensation arising from a PPI arrangement, PRs will need to consider if there is sufficient information to make a claim direct to the FI in question, or if it would be more cost-effective to the estate for the matter to be pursued through one of the many firms offering a PPI claims service.

Even though they charge commission, if the amount of any claim is likely to be relatively modest, it might still be more cost-effective to use a PPI claims service rather than for a professional executor to investigate the situation themselves. As mentioned above, such service providers appear only to need very basic information to identify if the deceased might have been entitled to make a claim.

While there can be no doubt that many individuals have not engaged with arrangements that would qualify them to receive PPI compensation, unless a PR can be satisfied as to the correctness of that position, they should probably give active consideration to signing up to one of the many ‘no win, no fee’ arrangements – just in case.