When to declare interest on Fixed rate 3 year account that is accrued to that account

polymaff

Blowed if I can remember where, but I recall some learned statement that if you agree to the accrual of interest, then the interest payment is considered to be made available for an instant between the interest arising and the interest going where you have agreed to have it consigned. A very flowery, archaic term was used to describe the state of the beneficiary at that instant. Anyone?

I've quoted SAIM2440 before on MSE. The problem is that it doesn't give a comprehensive definition of the term "made available".

Hence this issue being regularly raised.

lindabea

antrobus wrote: »

So if you have, for example,a fixed rate 3 year account, that does not permit withdrawals before maturity, then all the interest is taxable on maturity. Whether or not the bank credits interest to the account annually or whatever is not relevant.

Hmmm... not convinced this is correct. I have a 3 year fixed savings account (since 2017), and on each tax year end since, the bank have sent notification to HMRC (seen it on my on line HMRC tax account)of the interest credited to my account. HMRC have treated this interest for tax purposes in the year it was credited to my account irrespective of the fact that I am not able to withdraw any of it.

So the way I regard this issue is that tax is paid on interest in the tax year the interest was paid - whether the interest is available to withdraw or not is irrelevant for tax purposes. It would seem that this is the way HMRC are treating it.

Tom99

I always choose monthly interest purely because I like to see it accruing.

polymaff

Tom99 wrote: »

I always choose monthly interest purely because I like to see it accruing.

... and it spreads out the year-to-year tax liability.

Uxb1

Tom99 wrote: »

I always choose monthly interest purely because I like to see it accruing.

Which is why the T&C's usually quote a lower rate if the interest is taken monthly as opposed to a higher one if all in one annual sum. Hence the monthly accrual/compounding rate at the slightly lower rate will add up to the same end result as the single annual payment.

I've also always regarded as the tax is due in the financial year the interest is paid - the fact that you choose to have the interest re-credited to the account and therefore blocked from access until the end of the term is a choice you have chosen to make.
I've never seen an account which does not give you this choice and enforces the interest to be only paid into the account.
There are I believe some Sharia compliant products where all the 'interest' (though they do not call it that) is rolled up and paid all in one go at the end of the term and in this case yes the interest would be declarable at the end.

lindabea

Uxb1 wrote: »

There are I believe some Sharia compliant products where all the 'interest' (though they do not call it that) is rolled up and paid all in one go at the end of the term and in this case yes the interest would be declarable at the end.

But this is not good practice for those who are on the border line of the higher rate tax threshold, as all the interest would be declared in one tax year and consequently, could end up paying tax on the interest at 40% instead of 20% in each year.

londoninvestor

lindabea wrote: »

So the way I regard this issue is that tax is paid on interest in the tax year the interest was paid - whether the interest is available to withdraw or not is irrelevant for tax purposes. It would seem that this is the way HMRC are treating it.

It sounds more like HMRC are just taking the data filed by the bank and not challenging it.

If the interest is inaccessible and you had no option at account opening to make it accessible, you could submit a tax return with the correct treatment if you wanted to, though it might mean a fair amount of hassle and explaining.

londoninvestor

Uxb1 wrote: »

I've also always regarded as the tax is due in the financial year the interest is paid - the fact that you choose to have the interest re-credited to the account and therefore blocked from access until the end of the term is a choice you have chosen to make.
I've never seen an account which does not give you this choice and enforces the interest to be only paid into the account.

I can't find a link now, but I'm sure I read a quote from HMRC backing up your point - i.e. if at account opening you could have selected the option to have interest paid annually, it's treated as arising annually for tax purposes even if you chose the "roll it up until maturity" option.