Tax on 5 year fixed rate bonds

intalex

masonic said:

intalex said:

A problem might happen where a saver declared annually to HMRC and the institution reported only once at maturity. Which means HMRC would consider/tax the saver "volunteered" declaration annually, and then see a much lower saver declaration amount in the maturity tax year relative to the institution reported amount, not exactly sure what course of action they might take at that point?

Institutions are not permitted to declare at maturity unless they credit interest only at maturity. Their obligation is to report interest credited.

Now this is very useful to know, thanks @masonic

masonic

intalex said:

coyrls said:

intalex said:

A problem might happen where a saver declared annually to HMRC and the institution reported only once at maturity. Which means HMRC would consider/tax the saver "volunteered" declaration annually, and then see a much lower saver declaration amount in the maturity tax year relative to the institution reported amount, not exactly sure what course of action they might take at that point?

I don't think we've seen any evidence that they take any course of action.

So say someone saves £50k in a 5-year fix @ 5% AER with interest paid into the fix annually:

Annual Interest Y1 - Y5: £2,500 ; £2,625 ; £2,756 ; £2,894 ; £3,039

For Y1-Y4 I imagine HMRC will happily accept the saver volunteered interest amounts and tax them accordingly.

For Y5, there will be a difference of £10,775 between the saver vs institution declarations, I can't imagine HMRC doing nothing, as a minimum they'd ask the saver for an explanation/breakdown to understand the gap.

Well if the saver volunteered £10,775 in Y5, but did not correct the Y1-Y4 values to zero, HMRC might not say a word, but the saver would pay a lot more tax than they needed.

intalex

masonic said:

intalex said:

coyrls said:

intalex said:

A problem might happen where a saver declared annually to HMRC and the institution reported only once at maturity. Which means HMRC would consider/tax the saver "volunteered" declaration annually, and then see a much lower saver declaration amount in the maturity tax year relative to the institution reported amount, not exactly sure what course of action they might take at that point?

I don't think we've seen any evidence that they take any course of action.

So say someone saves £50k in a 5-year fix @ 5% AER with interest paid into the fix annually:

Annual Interest Y1 - Y5: £2,500 ; £2,625 ; £2,756 ; £2,894 ; £3,039

For Y1-Y4 I imagine HMRC will happily accept the saver volunteered interest amounts and tax them accordingly.

For Y5, there will be a difference of £10,775 between the saver vs institution declarations, I can't imagine HMRC doing nothing, as a minimum they'd ask the saver for an explanation/breakdown to understand the gap.

Well if the saver volunteered £10,775 in Y5, but did not correct the Y1-Y4 values to zero, HMRC might not say a word, but the saver would pay a lot more tax than they needed.

I meant the saver volunteered only £3,039 but the institution reported the total for all 5 years i.e. £13,814 which means the saver's declaration would be short by £10,775.

But as you've clarified that the institution couldn't possibly credit annually but report the total at maturity, then this scenario shouldn't really happen anyway.

masonic

intalex said:

masonic said:

intalex said:

coyrls said:

intalex said:

A problem might happen where a saver declared annually to HMRC and the institution reported only once at maturity. Which means HMRC would consider/tax the saver "volunteered" declaration annually, and then see a much lower saver declaration amount in the maturity tax year relative to the institution reported amount, not exactly sure what course of action they might take at that point?

I don't think we've seen any evidence that they take any course of action.

So say someone saves £50k in a 5-year fix @ 5% AER with interest paid into the fix annually:

Annual Interest Y1 - Y5: £2,500 ; £2,625 ; £2,756 ; £2,894 ; £3,039

For Y1-Y4 I imagine HMRC will happily accept the saver volunteered interest amounts and tax them accordingly.

For Y5, there will be a difference of £10,775 between the saver vs institution declarations, I can't imagine HMRC doing nothing, as a minimum they'd ask the saver for an explanation/breakdown to understand the gap.

Well if the saver volunteered £10,775 in Y5, but did not correct the Y1-Y4 values to zero, HMRC might not say a word, but the saver would pay a lot more tax than they needed.

I meant the saver volunteered only £3,039 but the institution reported the total for all 5 years i.e. £13,814 which means the saver's declaration would be short by £10,775.

But as you've clarified that the institution couldn't possibly credit annually but report the total at maturity, then this scenario shouldn't really happen anyway.

Indeed, but volunteering/confirming incorrect figures is going a step further than merely letting HMRC act on the information from other sources without any input from you. If you go as far as providing information to HMRC, then it would be advisable to ensure your submission is correct.

Ocelot

metrobus said:

Ocelot said:

All my longer term bonds report interest annually, although I can't access the interest.

Could I ask who are the bonds held with, I have a 3 year bond with Nationwide that I am concerned about.

I don 't have that many at the moment, but my interest on 2-3 year bonds is reported annually by: Atom, Secure Trust, Charter, Paragon, Kent Reliance, Nationwide, Skipton, Leeds & Holbeck and others, none of which I have access to, yet I get taxed on annually. 

A year or so the general consensus on this forum was that if you were not given the option of receiving interest annually (which has been touched on this thread) you may not have your interest reported annually. This still seems to be the most feasible option, although I can't be sure, and can't remember if any of my accounts didn't have this option.

What I can say is that I have never received interest monthly, have always had it added to the account, yet have always been taxed on it annually (despite not having access), for the last 6 years.

intalex

masonic said:

intalex said:

masonic said:

intalex said:

coyrls said:

intalex said:

A problem might happen where a saver declared annually to HMRC and the institution reported only once at maturity. Which means HMRC would consider/tax the saver "volunteered" declaration annually, and then see a much lower saver declaration amount in the maturity tax year relative to the institution reported amount, not exactly sure what course of action they might take at that point?

I don't think we've seen any evidence that they take any course of action.

So say someone saves £50k in a 5-year fix @ 5% AER with interest paid into the fix annually:

Annual Interest Y1 - Y5: £2,500 ; £2,625 ; £2,756 ; £2,894 ; £3,039

For Y1-Y4 I imagine HMRC will happily accept the saver volunteered interest amounts and tax them accordingly.

For Y5, there will be a difference of £10,775 between the saver vs institution declarations, I can't imagine HMRC doing nothing, as a minimum they'd ask the saver for an explanation/breakdown to understand the gap.

Well if the saver volunteered £10,775 in Y5, but did not correct the Y1-Y4 values to zero, HMRC might not say a word, but the saver would pay a lot more tax than they needed.

I meant the saver volunteered only £3,039 but the institution reported the total for all 5 years i.e. £13,814 which means the saver's declaration would be short by £10,775.

But as you've clarified that the institution couldn't possibly credit annually but report the total at maturity, then this scenario shouldn't really happen anyway.

Indeed, but volunteering/confirming incorrect figures is going a step further than merely letting HMRC act on the information from other sources without any input from you. If you go as far as providing information to HMRC, then it would be advisable to ensure your submission is correct.

I think we are causing a confusion now, what I mean is Saver = Annual Declaration, Institution = Maturity Declaration.

I think my example with the 5-year fix overlapped with your clarification that institutions cannot credit interest annually but only report (the total) once at maturity. We should really delete messages in reverse until we get to your clarification post to avoid anyone else getting confused.

masonic

intalex said:

masonic said:

intalex said:

masonic said:

intalex said:

coyrls said:

intalex said:

A problem might happen where a saver declared annually to HMRC and the institution reported only once at maturity. Which means HMRC would consider/tax the saver "volunteered" declaration annually, and then see a much lower saver declaration amount in the maturity tax year relative to the institution reported amount, not exactly sure what course of action they might take at that point?

I don't think we've seen any evidence that they take any course of action.

So say someone saves £50k in a 5-year fix @ 5% AER with interest paid into the fix annually:

Annual Interest Y1 - Y5: £2,500 ; £2,625 ; £2,756 ; £2,894 ; £3,039

For Y1-Y4 I imagine HMRC will happily accept the saver volunteered interest amounts and tax them accordingly.

For Y5, there will be a difference of £10,775 between the saver vs institution declarations, I can't imagine HMRC doing nothing, as a minimum they'd ask the saver for an explanation/breakdown to understand the gap.

Well if the saver volunteered £10,775 in Y5, but did not correct the Y1-Y4 values to zero, HMRC might not say a word, but the saver would pay a lot more tax than they needed.

I meant the saver volunteered only £3,039 but the institution reported the total for all 5 years i.e. £13,814 which means the saver's declaration would be short by £10,775.

But as you've clarified that the institution couldn't possibly credit annually but report the total at maturity, then this scenario shouldn't really happen anyway.

Indeed, but volunteering/confirming incorrect figures is going a step further than merely letting HMRC act on the information from other sources without any input from you. If you go as far as providing information to HMRC, then it would be advisable to ensure your submission is correct.

I think we are causing a confusion now, what I mean is Saver = Annual Declaration, Institution = Maturity Declaration.

On the contrary, I think it is an important point to make that the saver should not make an erroneous annual declaration. If they did so in the knowledge that it was incorrect, that could be seen as tax evasion, otherwise it could be seen as their error that they could be penalised for - if it ever came to light. It doesn't matter what the institution reports. If a saver wishes to allow HMRC to charge them the wrong amount of tax, then the best course of action would be to say nothing (if they have that option).

Several on this forum contact HMRC each year to provide/check interest figures so that their tax code isn't adjusted unduly. In doing so, they would be obliged to point out any interest HMRC knew of that had not arisen for tax.

intalex said:
I think my example with the 5-year fix overlapped with your clarification that institutions cannot credit interest annually but only report (the total) once at maturity. We should really delete messages in reverse until we get to your clarification post to avoid anyone else getting confused.

No, that's not what I said. Institutions can credit interest annually (or monthly etc). If they do they must report to HMRC what interest they've credited during the tax year whether or not it is taxable in the same tax year. It should not be taxed in the same tax year if it was not made available to the saver. In your example above, the institution must report "Annual Interest Y1 - Y5: £2,500 ; £2,625 ; £2,756 ; £2,894 ; £3,039", but the saver must be taxed on £13,814 in year 5. Without the saver's intervention, this will not happen.

intalex

masonic said:

intalex said:

masonic said:

intalex said:

masonic said:

intalex said:

coyrls said:

intalex said:

A problem might happen where a saver declared annually to HMRC and the institution reported only once at maturity. Which means HMRC would consider/tax the saver "volunteered" declaration annually, and then see a much lower saver declaration amount in the maturity tax year relative to the institution reported amount, not exactly sure what course of action they might take at that point?

I don't think we've seen any evidence that they take any course of action.

So say someone saves £50k in a 5-year fix @ 5% AER with interest paid into the fix annually:

Annual Interest Y1 - Y5: £2,500 ; £2,625 ; £2,756 ; £2,894 ; £3,039

For Y1-Y4 I imagine HMRC will happily accept the saver volunteered interest amounts and tax them accordingly.

For Y5, there will be a difference of £10,775 between the saver vs institution declarations, I can't imagine HMRC doing nothing, as a minimum they'd ask the saver for an explanation/breakdown to understand the gap.

Well if the saver volunteered £10,775 in Y5, but did not correct the Y1-Y4 values to zero, HMRC might not say a word, but the saver would pay a lot more tax than they needed.

I meant the saver volunteered only £3,039 but the institution reported the total for all 5 years i.e. £13,814 which means the saver's declaration would be short by £10,775.

But as you've clarified that the institution couldn't possibly credit annually but report the total at maturity, then this scenario shouldn't really happen anyway.

Indeed, but volunteering/confirming incorrect figures is going a step further than merely letting HMRC act on the information from other sources without any input from you. If you go as far as providing information to HMRC, then it would be advisable to ensure your submission is correct.

I think we are causing a confusion now, what I mean is Saver = Annual Declaration, Institution = Maturity Declaration.

On the contrary, I think it is an important point to make that the saver should not make an erroneous annual declaration. If they did so in the knowledge that it was incorrect, that could be seen as tax evasion, otherwise it could be seen as their fault. It doesn't matter what the institution reports. If a saver wishes to allow HMRC to charge them the wrong amount of tax, then the best course of action would be to say nothing (if they have that option).

Several on this forum contact HMRC each year to provide/check interest figures so that their tax code isn't adjusted unduly. In doing so, they would be obliged to point out any interest HMRC knew of that had not arisen for tax.

intalex said:
I think my example with the 5-year fix overlapped with your clarification that institutions cannot credit interest annually but only report (the total) once at maturity. We should really delete messages in reverse until we get to your clarification post to avoid anyone else getting confused.

No, that's not what I said. Institutions can credit interest annually (or monthly etc). If they do they must report to HMRC what interest they've credited during the tax year whether or not it is taxable in the same tax year. It should not be taxed in the same tax year if it was not made available to the saver.

Then the distinction between being able to declare interest annually or at maturity lies entirely on whether the account/product initially provided an option of paying interest out to an external account, regardless of whether the option was taken or not.

And to make it even clearer, saver 1 whose fix had the pay-out interest option but didn't take the option will have to declare annually, whereas saver 2 whose fix did not have the pay-out interest option but otherwise had exactly the same annually credited interest into the fix as saver 1 will be forced to declare at maturity??

Edit: When I say declare, I mean be considered for tax purposes.

masonic

intalex said:

masonic said:

intalex said:

masonic said:

intalex said:

masonic said:

intalex said:

coyrls said:

intalex said:

A problem might happen where a saver declared annually to HMRC and the institution reported only once at maturity. Which means HMRC would consider/tax the saver "volunteered" declaration annually, and then see a much lower saver declaration amount in the maturity tax year relative to the institution reported amount, not exactly sure what course of action they might take at that point?

I don't think we've seen any evidence that they take any course of action.

So say someone saves £50k in a 5-year fix @ 5% AER with interest paid into the fix annually:

Annual Interest Y1 - Y5: £2,500 ; £2,625 ; £2,756 ; £2,894 ; £3,039

For Y1-Y4 I imagine HMRC will happily accept the saver volunteered interest amounts and tax them accordingly.

For Y5, there will be a difference of £10,775 between the saver vs institution declarations, I can't imagine HMRC doing nothing, as a minimum they'd ask the saver for an explanation/breakdown to understand the gap.

Well if the saver volunteered £10,775 in Y5, but did not correct the Y1-Y4 values to zero, HMRC might not say a word, but the saver would pay a lot more tax than they needed.

I meant the saver volunteered only £3,039 but the institution reported the total for all 5 years i.e. £13,814 which means the saver's declaration would be short by £10,775.

But as you've clarified that the institution couldn't possibly credit annually but report the total at maturity, then this scenario shouldn't really happen anyway.

Indeed, but volunteering/confirming incorrect figures is going a step further than merely letting HMRC act on the information from other sources without any input from you. If you go as far as providing information to HMRC, then it would be advisable to ensure your submission is correct.

I think we are causing a confusion now, what I mean is Saver = Annual Declaration, Institution = Maturity Declaration.

On the contrary, I think it is an important point to make that the saver should not make an erroneous annual declaration. If they did so in the knowledge that it was incorrect, that could be seen as tax evasion, otherwise it could be seen as their fault. It doesn't matter what the institution reports. If a saver wishes to allow HMRC to charge them the wrong amount of tax, then the best course of action would be to say nothing (if they have that option).

Several on this forum contact HMRC each year to provide/check interest figures so that their tax code isn't adjusted unduly. In doing so, they would be obliged to point out any interest HMRC knew of that had not arisen for tax.

intalex said:
I think my example with the 5-year fix overlapped with your clarification that institutions cannot credit interest annually but only report (the total) once at maturity. We should really delete messages in reverse until we get to your clarification post to avoid anyone else getting confused.

No, that's not what I said. Institutions can credit interest annually (or monthly etc). If they do they must report to HMRC what interest they've credited during the tax year whether or not it is taxable in the same tax year. It should not be taxed in the same tax year if it was not made available to the saver.

Then the distinction between being able to declare interest annually or at maturity lies entirely on whether the account/product initially provided an option of paying interest out to an external account, regardless of whether the option was taken or not.

That's a matter of opinion (and we don't know which opinion is right). There is conflicting information in the HMRC forums about this. The only way to be sure you can declare your interest annually is to have the interest paid to an external account so that it can definitely be accessed.

intalex said:
And to make it even clearer, saver 1 whose fix had the pay-out interest option but didn't take the option will have to declare annually, whereas saver 2 whose fix did not have the pay-out interest option but otherwise had exactly the same annually credited interest into the fix as saver 1 will be forced to declare at maturity??

Edit: When I say declare, I mean be considered for tax purposes.

The letter of the law appears to suggest that both should declare all of the interest at maturity. Most of the responses on the HMRC forum support this, but one does not (supporting the view that declining an option to access the money does not mean it wasn't available). The situation still isn't clear. My personal opinion is that the dissenting opinion is the result of a misunderstanding, and if you enter into T&Cs that prevent you from accessing interest, even voluntarily, and are subsequently bound by those terms, then the interest does not arise until you are able to access the interest.

intalex

masonic said:

The letter of the law appears to suggest that both should declare all of the interest at maturity. Most of the responses on the HMRC forum support this, but one does not (supporting the view that declining an option to access the money does not mean it wasn't available). The situation still isn't clear. My personal opinion is that the dissenting opinion is the result of a misunderstanding, and if you enter into T&Cs that prevent you from accessing interest, even voluntarily, and are subsequently bound by those terms, then the interest does not arise until you are able to access the interest.

Unless someone's personal income/tax circumstances suit, and they can benefit from coinciding fixed account maturity to a specific tax year, this rule may deter savers from being able to enjoy compounding of interest on multi-year fixes. This may even make accounts without pay-out option unpopular, if savers start understanding this rule.

Interest is a function of time and as a default should be taxed when it is earned (accrued), I don't see the significance of accessibility over being forced to (as opposed to having an option to) defer all interest to be taxed at maturity. Sure it causes a cash flow issue for the saver if taxed annually, but the saver should still be able to choose. Once interest is credited it becomes part of the account balance and is actually earning its own (compounded) interest, and that's about as crystallised an income as anything. How accessibility steers this logical interpretation just doesn't make sense.