Instalment offers: recalculating the penalty
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 apercentage 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 ofpayment. The use of half the period in the computation broadly compensates for the factthat 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 underthe 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.
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 monthlyrepayments 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 into36 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 theletter of offer (IHTM36346).
If the instalments are not equal or equally spaced you will need to calculate the additionmore precisely. This will involve using the same percentage but applying it by referenceto reducing balances - although you do not normally have to calculate this withmathematical precision.