Tax on interest not received because of early closure penalty
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you would treat the penalty as a capital loss for cgt purposes (can be carried forward)0

Reed_Richards said:Suppose you have an account that pays interest annually on 1st November but is subject to a 6 month interest penalty for early closure. It almost looks as if:
 You close your account on 31st October. You pay tax on half a year's worth of interest credited to your account on closure
 You close your account on 2nd November. A full year's interest was credited to your account the previous day. You lose half of that as a penalty but, if what others say is true, you are taxed on all of it.
You are paid interest. It is taxable.
You suffer a penalty for early withdrawal which is equivalent to X number of days interest. That is how the penalty is calculated. It doesn't reduce the interest you have been paid.
Has the penny dropped yet?4 
IanManc said:Reed_Richards said:Suppose you have an account that pays interest annually on 1st November but is subject to a 6 month interest penalty for early closure. It almost looks as if:
 You close your account on 31st October. You pay tax on half a year's worth of interest credited to your account on closure
 You close your account on 2nd November. A full year's interest was credited to your account the previous day. You lose half of that as a penalty but, if what others say is true, you are taxed on all of it.
You are paid interest. It is taxable.
You suffer a penalty for early withdrawal which is equivalent to X number of days interest. That is how the penalty is calculated. It doesn't reduce the interest you have been paid.
Has the penny dropped yet?Example 2
Sam entered into a five year fixedterm bond on 6 April 2017. The bond credits interest to Sam’s account annually on the 31 December. Sam can only gain access to both the annual interest and the principal in advance of 5 April 2022 if a penalty is paid for early access.
Since the terms and conditions of the bond allow Sam to draw on the funds, although with a penalty, the interest arises and is taxable each year as it is credited.
If the terms and conditions of the bond did not allow access until maturity, the interest would arise and be taxed at that point.This was an ideal opportunity to mention how the penalty is treated for tax purposes, but they don't.
Reed0 
Reed_Richards said:Suppose you have an account that pays interest annually on 1st November but is subject to a 6 month interest penalty for early closure.1

Reed_Richards said:
This was an ideal opportunity to mention how the penalty is treated for tax purposes, but they don't.
ITTOIA05/S370 provides that tax is charged on the full amount of interest arising in the tax year. This means that a person receiving interest cannot set off any interest payable, bank charges or similar amounts against sums chargeable under ITTOIA05/S369.
5 
I have found the same debate here: https://www.accountingweb.co.uk/anyanswers/bankinterestandtaxdeducted
The issue is not resolved but Ernest N Dever thinks that, in effect, the penalty is tax deductible.Reed0 
Reed_Richards said:I have found the same debate here: https://www.accountingweb.co.uk/anyanswers/bankinterestandtaxdeducted
The issue is not resolved but Ernest N Dever thinks that, in effect, the penalty is tax deductible.
That's not what actually happens in the real world, so further hypothesising about that is invalid....3
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