If a penalty is to be paid by instalments the expected offer
(
IHTM36174) should be increased. The
increase is calculated by applying to the total unpaid balance a
percentage equal to the current rate of statutory interest (
IHTM30341) under IHTA84/S233, plus 1%
(to cover the cost and risk elements) for half the period of
payment. The use of half the period in the computation broadly
compensates for the fact that the addition should be calculated by
reference to a progressively reducing balance. This increase is not
statutory interest payable under IHTA84/S233 - it is payable under
the terms of the contract and the consideration for it is the time
allowed for payment. This addition is to be treated as a penalty
when reporting yield.
Example
The expected offer is £10,000 and offer to pay
£5,250 up front with the balance of £4,750 on
instalments. If the current statutory interest rate is 4% and the
monthly repayments are to spread over 3 years, the increase should
be
£4,750 X 5% X 3/2 = £356
The expected offer becomes £10,356 with £5,106 to
pay. Since this cannot be divided into 36 equal instalments, you
may find it convenient to suggest a first instalment of £136,
followed by 35 instalments of £142 each. This will have to be
set out clearly in the letter of offer (
IHTM36346).
If the instalments are not equal or equally spaced you will
need to calculate the addition more precisely. This will involve
using the same percentage but applying it by reference to reducing
balances - although you do not normally have to calculate this with
mathematical precision.
