Help! HMRC want another 20% Tax from my Savings Interest

Tudor_2

I set up a deposit account when we sold our house 3 years ago and went into rented accomodation. The account was in my name and I wanted the interest paid monthly into my wifes current bank account, to pay the rent.

The B&B wouldn't do this, they would only pay the interest into my account, as I was the account holder. They won't pay it to a 3rd party even if it's your civil wife.

So, each month I manually did a transfer of the interest received into my current account, into my wifes. She received the interest, usually the same day or day after it came into my account.
I would then do a Tax return each year for my wife, declaring the interest paid and tax deducted at source and claim her personal allowance. This would result in a tax rebate paid to her, as she has no other form of income.

I thought this was all fine until, last week, HMRC are now saying that as I was the account holder and am a 40% tax payer - I now owe them another 20% Tax from the interest received. With interest and penalties this could run up to around £20,000!

It doesn't seem to matter that I paid the interest to my wife each month, which all seems VERY unfair.

Anyone out there with any similar experiences or advice would be most welcomed.

Many Thanks.

WestonDave

Unfortunately for you they are right.

Tax is paid on income you earn. The money is in an account in your name, and has earned interest - therefore you earned it. The fact that you subsequently gifted it to your wife does not equate to her earning the interest. The only way you can make this sort of tax saving work is to put the capital in an account in your wife's name (but there are obviously consequences to that).

Sorry to say but they've got you on this one. If you are lucky and convince them it was an honest mistake thinking it was her income they may let you off the penalties, but the rest is due and payable. If you are really lucky you may get away with convincing them that in effect it was a joint asset and that the income should be shared thereby cutting the amount due in half - but this is an extremely long shot. Best advice is to talk to them.

Edited to add - by the way B&B were also correct, but even had they paid the interest into her account it would still have been your interest earned on your money.

Tudor_2

Ok. Many thanks Dave.
I know a few people who have done this and appeared to have 'got away with it', but, not for me. Hopefully, they won't be too hard on the penalty.
Happy Christmas!!

Any

Hi Tudor,
If you know people that got away with it, than that is only because HM Revenue didn't investigate their case yet. The rules are absolutely clear and what you have done is clearly out of the rules. And believe me, when HM Revenue gets to those people you know that got away with it, they will pay penalty as well.
For future reference, transfer the whole savings to your wife (of course only if you trust her enough, but than as she is your wife why wouldn't you?) and you will avoid this problem.

tyllwyd

I can't find where I read it so I may well be wrong - but I thought there were cases where the HMRC has said that since the husband still had an interest in the money, even transferring the capital into the wife's name wasn't enough to avoid him being liable for tax on the interest. But like I said, I may have imagined it!

Any

Re: Tylwyd
I am an accountant and I've never heard that... It could have been looked at from the other side as well... Since the not earning wife is living off the husbands earnings why should he pay 40% tax on income at the same level as single person???

sdooley

As things stand not only does the OP stand to pay back the extra 20% to bring his tax paid up from 20% to 40% but when HMRC put two and two together they will also claim back the 20% rebates received by his wife as it did not relate to her tax, again with interest and penalties.

What matters is who owns the capital and has the right to the interest as generated. Not who receives the interest or who it is paid on to.

Normally you can tell that by looking at whose name the bank account is in. If the OP had transferred his savings to his wife then the interest would be hers - she would also have the right to do whatever she wanted with the capital. If he transferred the money to his wife subject to an agreement that she would hold it on trust for him/pay it back to him on demand - the money isn't really hers whatever it says on the bank account.

But keeping the money in your own name means it's your money and your interest, even if you normally give the cash when you receive it to your wife.

However if the money was all the proceeds of sale from a jointly owned house, there is a strong argument here that the money belonged to the husband and wife jointly. If so the interest would be treated like joint account interest - so the OP should have paid 40% tax on half of it but not the other half. But HMRC will take some convincing.

Mikeyorks

sdooley wrote: »

But HMRC will take some convincing.

So would I.

That line of argument begs the question that if the property was singleton name .... but the proceeds were put into a joint account then HMRC would correctly decline to accept 50% of the interest was applicable to the wife.

Or the fact that a lot of 'my' savings are in my wife's name to make use of her PA ..... but HMRC should be looking instead at the underlying origination of the capital .... ?

Let's not go there!

sdooley

Mikeyorks wrote: »

Or the fact that a lot of 'my' savings are in my wife's name to make use of her PA ..... but HMRC should be looking instead at the underlying origination of the capital .... ?:p

The legal presumption if you have paid money into your wife's account is that it is a gift to her. So I think you're ok.:D Interestingly there's no corresponding presumption at law for gifts from a wife to a husband - not an argument I would wish to rely on in talks with the Revenue - but if needs must.:cool:

Tudor_2

Ok,I hear what you all are saying and I've no doubt it is all correct. But, the thing that gets me is - if we had split up at the time we sold our house, my wife would still have had a legal entitlement to half that money.
So, surely, the 'asset' is owned 50/50 and should be taxed accordingly?

Any

If you opened the account in joint names, than it would be...
From your posts that seems you failed to do...