When to pay tax on interest for multi-year savings accounts?

nottinghammer

Hi all,
A quick question: I do have an old savings account overseas that runs another 10 years. It pays about 2% interest a year that is paid into the account (it also pays a bonus at the end). I can see the annual interest payments in my account but I can't access them. However, I could cancel the whole savings account anytime with 3 months notice. The interest is taxable in the UK.

When do I need to pay UK tax on the interest? 

A ) Every year?
B ) Only at the very end when the account gets dissolved?

So far I paid it annually (as in Option A) but MSE's section on multi-year UK savings accounts says "On multi-year accounts, you're taxed on savings interest in the tax year you can access that interest". Is there any HMRC guidance on this? 

Many thanks,

N

wmb194

nottinghammer said:

Hi all,
A quick question: I do have an old savings account overseas that runs another 10 years. It pays about 2% interest a year that is paid into the account (it also pays a bonus at the end). I can see the annual interest payments in my account but I can't access them. However, I could cancel the whole savings account anytime with 3 months notice. The interest is taxable in the UK.

When do I need to pay UK tax on the interest? 

A) Every year?
Only at the very end when the account gets dissolved?

So far I paid it annually (as in Option A) but MSE's section on multi-year UK savings accounts says "On multi-year accounts, you're taxed on savings interest in the tax year you can access that interest". Is there any HMRC guidance on this? 

Many thanks,

N

If the interest is accessible i.e. in this case by giving notice then it arises for tax purposes when it is credited to the account, so annually

eskbanker

nottinghammer said:

So far I paid it annually

Have you been consciously choosing to do this, e.g. via self-assessment, or is it happening automatically by virtue of the provider notifying HMRC of interest being added to the account?

There is some detailed HMRC guidance on this, deep within the internal manuals (will look for the link), but if the provider chooses to notify HMRC of the interest every year then that seems to drive the taxation liability, regardless of theoretical policy!

Edit: link is https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim2440 and associated pages.

nottinghammer

eskbanker said:

nottinghammer said:

So far I paid it annually

Have you been consciously choosing to do this, e.g. via self-assessment, or is it happening automatically by virtue of the provider notifying HMRC of interest being added to the account?

There is some detailed HMRC guidance on this, deep within the internal manuals (will look for the link), but if the provider chooses to notify HMRC of the interest every year then that seems to drive the taxation liability, regardless of theoretical policy!

Edit: link is https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim2440 and associated pages.

Thanks, that link makes it very clear! (and also thanks to @wmb194). The bank is in Belgium and does not deduct tax. I just include this in my UK self assessment as overseas interest income. But the bank will inform HMRC of interest payment via the international data exchange, and I assume they bank will do this in a way that implies that the interest arises every year. And when I lived in Belgium, tax was deducted automatically by the bank every year. That's why I always (and turns out correctly) assumed I need to pay annually in the UK. 

Thanks,
N

EthicsGradient

The HMRC link appears to make things very clear (and in this case, since there's the option to close early, I'd say it is), but I think it's worth noting a reply to me on the HMRC forum by one of their admins:

https://community.hmrc.gov.uk/customerforums/pt/125fb468-2427-ed11-b5cf-00155d9c6b71

"As you are notified annually of the interest, it is deemed to have been paid and should therefore be declared in that tax year. The certificate will confirm the year end date it applies to."
That seems, to me, to contradict the saim2440 article that says " "If the terms and conditions of the bond did not allow access until maturity, the interest would arise and be taxed at that point".

Of course, when I asked SmartSave about this, where I have a fixed 3 year account (no early closure option, it hasn't yet run one year), to make sure they will give me a certificate each year, they replied there had been no need to issue certificates since savings tax stopped being deducted at source, and they would just update the balance online each year.

I plan to take a screenshot after the first anniversary, and use that and the HMRC forum reply to say "you state this is declarable each year, not just at maturity".

Albermarle

"As you are notified annually of the interest, it is deemed to have been paid and should therefore be declared in that tax year. The certificate will confirm the year end date it applies to."
That seems, to me, to contradict the saim2440 article that says " "If the terms and conditions of the bond did not allow access until maturity, the interest would arise and be taxed at that point".

Yes there seems to be some disparity between the two statements, so as discussed in other threads it is not totally clear what is going on. The new NS&I 3 year green bonds state explicitly that any tax due will be on the interest paid at maturity. I remember another poster that said Zopa said the same.

Notepad_Phil

Albermarle said:

"As you are notified annually of the interest, it is deemed to have been paid and should therefore be declared in that tax year. The certificate will confirm the year end date it applies to."
That seems, to me, to contradict the saim2440 article that says " "If the terms and conditions of the bond did not allow access until maturity, the interest would arise and be taxed at that point".

Yes there seems to be some disparity between the two statements, so as discussed in other threads it is not totally clear what is going on. The new NS&I 3 year green bonds state explicitly that any tax due will be on the interest paid at maturity. I remember another poster that said Zopa said the same.

I've wondered in the past whether the taxation of all interest at maturity only occurs on those accounts where there was explicitly no way in which interest could be withdrawn from the account, so as most multiple year accounts do at least give you the option when you open it to withdraw the annual interest then they report the interest yearly for everyone - i.e. everyone was able to take the interest out, it's just that some chose not to take that option on opening.

If the zopa account is like the one I looked at then the interest explicitly can only be accessed at the end of the term, which is as per the NS&I green bonds, so their interest is taxable in the maturing year.

I don't know whether the smartsave account gives you the option to withdraw annually, but even if it doesn't then the latest faq's (which I assume also apply to Ethic's account) do say that interest will be returned if it takes the balance over £85k. So there is a means by which interest can be withdrawn, it's just that you need to have £85k in the account. So again everyone is able to take the interest out, it's just that some chose not to put £85k in the account...

I've no idea whether I'm right or wrong (though I've not come across one that doesn't seem to follow my thoughts when they have at least the option of withdrawing), so now I only save money in multiple year accounts where I am able to withdraw the interest to another account so that I'm 100% sure of when the interest is to be counted as taxable.

GeoffTF

I have a lot of no access term accounts and pay the tax annually. My next door neighbour is a tax adviser. She says that is OK, despite what the HMRC internal manual says. I can choose whether to pay annually or at maturity. She says HMRC will see what I am doing. Provided that I am consistent, they will be happy. That has been the case for me.

TiVo_Lad

SAIM2400 seems to make it pretty clear.

In Dunmore v McGowan (1978) (52TC307) it was held to include the ‘swelling of a person’s assets’ even where the person had no immediate right to the income.

If your assets are swollen, regardless if whether you can get your hands on them or not, HMRC are going to want some of it.

Bigwheels1111

I have 2 five year fixed rate bonds and should have a third one in a week or two.
Ive opted for annual payout to nominated account. For income and tax purposes.
I will fill out my tax return every year and all should be fine.

Notepad_Phil

TiVo_Lad said:

SAIM2400 seems to make it pretty clear.

In Dunmore v McGowan (1978) (52TC307) it was held to include the ‘swelling of a person’s assets’ even where the person had no immediate right to the income.

If your assets are swollen, regardless if whether you can get your hands on them or not, HMRC are going to want some of it.

I'm not sure it does. There are other examples in saim2440 where people's assets are swollen on an annual basis and they are taxed at maturity.

The Dunmore case is where the interest was in an account that had been charged as security for a business guarantee and hence the interest could not be withdrawn due to that security. If the account hadn't been used as security then the interest could have been withdrawn and hence why the HMRC ruled that it was taxable.