Joint Account Tax

usernameinuse

Hi there,

My partner and I recently came into a bit of money and are thinking of opening up some joint accounts. What we're wondering is, if the interest we accumulate on our joint accounts will be taxed as if it were one source of income from one person.

The reason is, using joint accounts we will earn approx. £40,000 from interest alone which will put us in the higher 40% tax band. However, if we opened up accounts for ourselves, it would be around £20,000 each and therefor in the lower 20% bracket.

So is interest from a joint account treated as two equal income sums and taxed as such, or would you be better opening a single account for each person?

Thanks!

oldvicar

This implies around £1 Million to save/invest, so the first thing to consider is the FSCS compensation scheme guarantees. To be totally covered by the guarantee you'd need to find about 8 separate banking groups to spread the money around. Some people (but not necessarily me) would argue that with this amount you need to invest in something more complicated than savings accounts and consult an IFA.

To answer the question, the interest from joint accounts will count as two equal sums, with HALF being allocated to each person.

Income Tax-wise it makes no difference whether the sums are saved in joint accounts, or half each in individual accounts.

The exceptions are:
(1) each can individually have a tax-free ISA, with up to £5640 added this year
(2) if the interest earned, when added to any other income, means that one person pays higher rate tax and the other doesn't, then it can make sense for income tax reasons alone to put more in the name of the lower rate taxpayer.
(3) There are Inheritance Tax consequences to be considered, and these will vary depending upon whether or not the 'partners' are married (including civil relationships, which = married for tax purposes).

justjohn

use all your tax breaks.
Isa,cgt etc

See a decent accountant. An accountant should be able too minimize your tax bill.

Banks are not always the best place too put money especially in this climate.

In-fact in my personnel opinion its one of the worst places to keep money for investment purposes/tax . OK for smallish amount you need quick access to.

thenudeone

If you have enough savings to create £40k interest, you should be paying someone to give you sound advice about how to legitimately reduce your tax bill, IMO!

To answer directly - Interest on a joint account is presumed to be shared 50:50 between the two holders. For instance, if only one person completes an R85 form, then half the interest is taxed, and the other half not taxed.

It may possible to get hmrc to accept a different split if you can demonstrate the source of the funds, but in that case it might be better to have a sole account (for the low or no-taxpayer) with a power of attorney or third party mandate if the other partner needs to access it.

usernameinuse

oldvicar wrote: »

This implies around £1 Million to save/invest, so the first thing to consider is the FSCS compensation scheme guarantees. To be totally covered by the guarantee you'd need to find about 8 separate banking groups to spread the money around. Some people (but not necessarily me) would argue that with this amount you need to invest in something more complicated than savings accounts and consult an IFA.

To answer the question, the interest from joint accounts will count as two equal sums, with HALF being allocated to each person.

Income Tax-wise it makes no difference whether the sums are saved in joint accounts, or half each in individual accounts.

The exceptions are:
(1) each can individually have a tax-free ISA, with up to £5640 added this year
(2) if the interest earned, when added to any other income, means that one person pays higher rate tax and the other doesn't, then it can make sense for income tax reasons alone to put more in the name of the lower rate taxpayer.
(3) There are Inheritance Tax consequences to be considered, and these will vary depending upon whether or not the 'partners' are married (including civil relationships, which = married for tax purposes).

Thanks for the timely and helpful reply, and one bearing good news too! As for the FSCS, I was already aware of this and going by current economical climates, wanted to be safe so figured numerous joint accounts at £170,000 would suffice. As for inheritance tax, the deceased’s estate has already taken care of those matters.

thenudeone wrote: »

If you have enough savings to create £40k interest, you should be paying someone to give you sound advice about how to legitimately reduce your tax bill, IMO!

To answer directly - Interest on a joint account is presumed to be shared 50:50 between the two holders. For instance, if only one person completes an R85 form, then half the interest is taxed, and the other half not taxed.

It may possible to get hmrc to accept a different split if you can demonstrate the source of the funds, but in that case it might be better to have a sole account (for the low or no-taxpayer) with a power of attorney or third party mandate if the other partner needs to access it.

As far as I can see my tax bill isn't terribly expensive. Considering that we'll be on the standard 20% income tax band, our only real tax, with the exception of VAT on consumables etc. for the time being will be:

Council Tax £2,677
Income Tax £8,000

Unless I'm naively missing something?

And thanks for the information on joint accounts, makes sense now.

xylophone

Are you married/in civil partnership? Have you considered your own wills/IHT position?

usernameinuse

xylophone wrote: »

Are you married/in civil partnership? Have you considered your own wills/IHT position?

While I'm only in my early twenties, and don't intend on leaving anytime soon, I will certainly be looking into it over the next year in order to make sure it gets taken care of in the event that odds betray me!

And no we are not married, but obviously realms of possibility have opened up to us now.

opinions4u

If you have a large wad make a will NOW and keep it up to date.

Mikeyorks

usernameinuse wrote: »

Unless I'm naively missing something?

Yes. You're opting out of the £10,600 (each) annual CGT allowance.

With the sort of money you're talking about - a chunk of it should be in investments. And not languishing in below inflation level cash accounts.

xylophone

And if you marry any pre-existing will is invalidated so make sure you make a new one!

Incidentally, you are both now going to have to complete tax returns.
http://www.hmrc.gov.uk/sa/need-tax-return.htm
"If you don't already complete a tax return, you'll need to do so if you receive any of the following:
£10,000 or more income from savings and investments"

usernameinuse

Thanks for help so far, guys.

Mikeyorks wrote: »

Yes. You're opting out of the £10,600 (each) annual CGT allowance.

With the sort of money you're talking about - a chunk of it should be in investments. And not languishing in below inflation level cash accounts.

I meant to ask about CGT. Is this something that will affect me, and if so, when and how? I'm not sure I understand what this tax applies to, specifically towards inheritance and interest.

I've looked into inflation rate in comparison to the interest rates I'll be getting and am more than satisfied. For example, current rates suggest a 3.5% inflation, which for an account with £170,000 in it for five years at 4.51% APR means that I'll get a return of around £41,952 over five years before tax, which (assuming the rate of inflation bobs around in the same place--unlikely I know, but it's bound to go down over five years I imagine?) is higher than the projected value of £170,000 in 2017--£201,906. Not by much (£10,000) but better than letting it rott away while we figure out what to do.

This will do us for the time being and we're not planning on wrapping all our money away in 5 year fix term accounts, just about 25-30% of it. Perhaps when we get settled we'll start looking into bigger investments, but I have no idea where to start so would no doubt have to seek advice from an IFA.

Thanks again!