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Legislation will be introduced in the Finance Bill 2019-20 to exempt payments made under the Windrush compensation scheme from income tax, inheritance tax and capital gains tax.
In 2018, the UK was caught up in a political scandal which saw people from Caribbean countries who arrived in the UK prior to 1973 as members of the ‘Windrush generation’, wrongly detained, denied legal rights, threatened with deportation, and, in at least 83 cases, wrongly deported from the UK by the Home Office.
The Windrush compensation scheme was proposed in response to the crisis to 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.
According to the government, the change in policy is aimed to give certainty to claimants and personal representatives acting on behalf of an estate of an individual, that payments made under the Windrush compensation scheme will not give rise to charges to income tax, inheritance tax and capital gains tax. The legislation also includes a provision for a new power to exempt 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.
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 and 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.
The HMRC has estimated that the impact on tax receipts will be around £5 million a year.