When are you liable for tax on interest on a multi year bond (interest not paid away)?)

kwangomango

I was led to believe that as long as the interest is declared annually (even though you don't access the interest until the bond matures) you could pay the tax on interest each year rather than a lump sum in the final year. A comment from HMRC confirms this:

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

So why does the 'MSE Analysis' on the best multi year fixed savings say this:
'Accounts paying interest 'at maturity' do so as a lump sum, which could take you over your personal savings allowance (PSA) for the year it matures.'
www.moneysavingexpert.com/savings/savings-accounts-best-interest/

Ozzig

They also say 

"Where the interest is held in the account, until the account matures, only then will the total sum of interest arising over the whole term, be taxable in the tax year it is paid."

Here ...

https://community.hmrc.gov.uk/customerforums/sa/6d88c895-4fcd-ed11-9ac4-00155d9771aa

In summary, call them before hitting SA submit and get some confirmation.

kwangomango

Ozzig said:

They also say 

"Where the interest is held in the account, until the account matures, only then will the total sum of interest arising over the whole term, be taxable in the tax year it is paid."

Here ...



In summary, call them before hitting SA submit and get some confirmation.

Ah, a conflicting confirmation!

Doctor_Who

This is a grey area and has been discussed many times. It all really depends on when the provider reports the interest to HMRC. For multi-year savings accounts this may be when the account matures or it may be annually. You can try asking the provider, although whether the CS staff will know the definitive answer is debatable.

Ozzig

kwangomango said:

Ozzig said:

They also say 

"Where the interest is held in the account, until the account matures, only then will the total sum of interest arising over the whole term, be taxable in the tax year it is paid."

Here ...



In summary, call them before hitting SA submit and get some confirmation.

Ah, a conflicting confirmation!

I guess as it's open to interpretation it will always happen, it'd just be nice if HMRC agreed an answer and all their advisors agreed on it.

The banks are just as bad, I've contacted all mine and had different answers for them.

Albermarle

Ozzig said:

kwangomango said:

Ozzig said:

They also say 

"Where the interest is held in the account, until the account matures, only then will the total sum of interest arising over the whole term, be taxable in the tax year it is paid."

Here ...



In summary, call them before hitting SA submit and get some confirmation.

Ah, a conflicting confirmation!

I guess as it's open to interpretation it will always happen, it'd just be nice if HMRC agreed an answer and all their advisors agreed on it.

The banks are just as bad, I've contacted all mine and had different answers for them.

Or quite likely in some cases, the staff you asked probably did not have a clue.

My interpretation of this grey area is that;

If the interest is unavailable until the end of the fixed term, the interest should technically be counted for tax reasons in the tax year it matures.
However if the savings provider adds interest to the account each year ( as most do ?),  they then report that to HMRC who tax it in that year.
Probably HMRC has enough problems, backlogs etc for them to just record interest statements as received from the providers, without looking into what type of account it is .
Worth noting that a few savings providers ( NS&I? Zopa? )do definitively state interest will only be added at the end of the fixed term, I think...

GeoffTF

If I do not have access to the money until maturity, a professional tax adviser has told me that I can either pay tax when interest is credited to my account or on maturity. As long as I am consistent, HMRC will be happy.

Ozzig

GeoffTF said:

If I do not have access to the money until maturity, a professional tax adviser has told me that I can either pay tax when interest is credited to my account or on maturity. As long as I am consistent, HMRC will be happy.

Which makes perfect sense.

If you had a 5-year bond and each year the bank declared £1000 interest, you could be liable for £400 tax each year. (very rough figures) 
Assuming you had exactly £0 disposable income, you'd need to borrow the money to pay the tax!

(I do appreciate in the real world you'd not lock that money away in a bond if it left you £0 per year disposable income. Just trying to make a point)

EthicsGradient

GeoffTF said:

If I do not have access to the money until maturity, a professional tax adviser has told me that I can either pay tax when interest is credited to my account or on maturity. As long as I am consistent, HMRC will be happy.

However, I don't think any of us can use that as a justification with HMRC - it's too far removed from us (if that was professional advice to you, you could use it), and there doesn't seem to have been anything from HMRC itself or a bank etc. saying "the taxpayer gets to choose which one".

GeoffTF

EthicsGradient said:

GeoffTF said:

If I do not have access to the money until maturity, a professional tax adviser has told me that I can either pay tax when interest is credited to my account or on maturity. As long as I am consistent, HMRC will be happy.

However, I don't think any of us can use that as a justification with HMRC - it's too far removed from us (if that was professional advice to you, you could use it), and there doesn't seem to have been anything from HMRC itself or a bank etc. saying "the taxpayer gets to choose which one".

That is correct. My personal experience is that HMRC allows tax to be paid whenever interest is paid into the account (which is what I expect most people do), but you cannot rely on that either. One of HMRC's replies in the link above clearly says that it is OK. The manual clearly says that paying on maturity is OK, provided that you do not have access to the money before maturity.

Money_Grabber13579

As I understand it, it all depends upon when the interest is made available to withdraw to the customer. If it is available to withdraw when the interest is credited to the account, that is the point at which it is taxed. However, if the interest is not available to withdraw until maturity, the. It will all be taxed at maturity.

This does seem to have been a recent change in policy from HMRC (NS&I got into a few problems when they started preventing access to fixed year bonds during the term) and I’ve noticed that at least one bank now states that for multi year bonds, the customer can withdraw the interest (but not the capital) annually, presumably to make sure that the interest is taxable annually.