Ask the Expert: Endowment special

This week's expert: Chas Roy-Chowdhury

BBC News Online's Ask the Expert column gives readers a chance to have their financial questions answered.

The most frequent questions we receive concern endowment mortgages.

These are a type of home loan that rely on a stock market-linked investment to repay the mortgage debt. They were widely sold in the 1980s and 1990s.

In the sixth part of our special series on endowments, Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants responds to a question posed by Your Money reader Richard Jackson about tax on endowment compensation.

Mr Jackson says he was informed by a colleague that the Inland Revenue is now charging tax on endowment payouts.

He wants to know if this is correct and if there is anywhere he can find out further information about this issue.

Chas Roy-Chowdhury writes:

People who were mis-sold financial products may have received compensation.

On 19 August the Inland Revenue announced that any "enhanced" element is subject to tax.

ASK THE EXPERT SPECIAL: Use the dropdown menu below "Ask the Expert: Endowments on the right-hand side of this story to search through previous answers to readers' endowment questions

Some people have received this "enhanced" element within their awards.

It is an additional payment, which has been awarded for loss of interest that the investor might have earned if he or she had not put the money into the mis-sold product.

The Revenue believes that this additional payment should be taxable.

Many firms who sold financial products inappropriately in the last few years, such as endowment mortgage policies, have been ordered to compensate their customers.

Some firms have deducted tax from the "enhanced" part of the compensation payments, others have not.

DEALING WITH SHORTFALLS "Your endowment mortgage - have you acted yet?" fact sheet sets out options for dealing with shortfalls (available from Financial Services Authority (FSA) website - see link on right) "Your endowment mortgage - making a complaint" fact sheet (also available from the FSA's website) The Consumers' Association has fact sheets and information on its dedicated website "endowment action"

The amount of money the Revenue refers to as interest is taxed at the savings rate - 20% for basic rate taxpayers (which should have been deducted by the insurance company already) and then another 20% for a higher-rate (or 40%) tax payer.

If you have received a compensation payment then check the paperwork you got with it.

If this indicates that you were receiving an "enhanced" payment element then the next step is to see if you were sent a certificate showing interest - part of the payment - was withheld.

ENDOWMENTS: WHO CAN HELP? Financial Ombudsman Service (FOS): Fact sheets on its website (see link on right), or contact its helpline (0845 080 1800) Financial Services Authority (FSA): Fact sheet "Your endowment - have you acted yet?" available on its website, or by calling 0845 456 1555 Financial Services Compensation Scheme (FSCS): Information on making a claim and Q&As on website

You should then consider whether, in the year you received the interest, you were a higher-rate tax payer during that tax year.

If you were, you may have additional tax to pay.

You may need to contact the Inland Revenue to help you work through this.

On the other hand if you received a compensation payment which mentioned an enhanced payment but the insurance company did not deduct tax from that, then contact the Revenue district dealing with your tax affairs and work through the documentation with them.

The bottom line is do not panic if you are in doubt, but talk to your local tax office today.

You can find your local tax office's contact details through the Revenue's website (see link on right).

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.