Tax on interest not received because of early closure penalty

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  • ColdIron
    ColdIron Posts: 9,028 Forumite
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    But as you have detailed in your own post, you have not paid tax on money you never received
    It's a penalty taken from capital
  • jimjames
    jimjames Posts: 17,596 Forumite
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    edited 14 November 2023 at 6:17PM
    eskbanker said:
    talexuser said:
    They refused to budge because the penalty was taken from capital so in their eyes I had received full interest, which obviously I had not as a total amount returned. I went through the Financial Ombudsman on the same principle and he came down on the side of the building society saying it was perverse I should pay tax on money I never got but that is the situation, because the terms and conditions stated penalty from capital and it is buyer beware to scan though the reams of small print every time you undertake a contract.

    So if the penalty is interest reduction you are ok, if capital reduction you have been done and a full interest statement will be sent to HMRC. I am self assessment and will enter the amount I actually received and if HMRC want an explanation I will say this is the income I actually got. The difference is only a handful of pounds but I think an important principle is at stake - you should not be forced to pay tax on "theoretical" money you never received.
    But you did receive that interest income (added to your capital), even though an amount equivalent to some (or even all) of it was then used to pay the stated penalty, so basically Coventry BS, FOS and HMRC are all on the same page as most on this thread but you're aligning with OP?
    Difficulty is that if you have £10,000 in account, earn £500 interest but then incur a £250 penalty so receive £10250 when you close it.

    You don't know that the £10250 is actually made up of £500 interest plus £9750 of capital where the £250 has been deducted. To the person receiving they might (and as per OP do think) that the payment is £10000 plus £250 interest.
    Remember the saying: if it looks too good to be true it almost certainly is.
  • eskbanker
    eskbanker Posts: 30,947 Forumite
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    jimjames said:
    eskbanker said:
    talexuser said:
    They refused to budge because the penalty was taken from capital so in their eyes I had received full interest, which obviously I had not as a total amount returned. I went through the Financial Ombudsman on the same principle and he came down on the side of the building society saying it was perverse I should pay tax on money I never got but that is the situation, because the terms and conditions stated penalty from capital and it is buyer beware to scan though the reams of small print every time you undertake a contract.

    So if the penalty is interest reduction you are ok, if capital reduction you have been done and a full interest statement will be sent to HMRC. I am self assessment and will enter the amount I actually received and if HMRC want an explanation I will say this is the income I actually got. The difference is only a handful of pounds but I think an important principle is at stake - you should not be forced to pay tax on "theoretical" money you never received.
    But you did receive that interest income (added to your capital), even though an amount equivalent to some (or even all) of it was then used to pay the stated penalty, so basically Coventry BS, FOS and HMRC are all on the same page as most on this thread but you're aligning with OP?
    Difficulty is that if you have £10,000 in account, earn £500 interest but then incur a £250 penalty so receive £10250 when you close it.

    You don't know that the £10250 is actually made up of £500 interest plus £9750 of capital where the £250 has been deducted. To the person receiving they might (and as per OP do think) that the payment is £10000 plus £250 interest.
    I agree that it's incumbent on providers to make available clear closure statements illustrating both interest paid and penalty deducted, as two separate transactions....
  • boingy
    boingy Posts: 1,330 Forumite
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    I'd have absolutely no qualms about declaring the actual amount I received on a tax return (not that I do tax returns any more). Let HMRC challenge it if they want to.
  • ColdIron
    ColdIron Posts: 9,028 Forumite
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    boingy said:
    I'd have absolutely no qualms about declaring the actual amount I received on a tax return (not that I do tax returns any more). Let HMRC challenge it if they want to.
    But the actual amount received was the full interest, as detailed on the statement
    talexuser said:
    They sent an interest statement showing the full interest without the penalty subtracted
    Any other figure would be misrepresentation, or a fraudulent declaration
  • eskbanker
    eskbanker Posts: 30,947 Forumite
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    Olinda99 said:
    the problem is advertising literature or key facts the penalty is not stated in terms of a capital deduction - it clearly says you lose x days or months 'interest'

    it does not say you lose the equivalent of x days or months interest taken from your capital
    Please link to some products where the penalty is clearly stated as loss of interest rather than a charge equivalent to a certain amount of interest....
  • masonic
    masonic Posts: 23,262 Forumite
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    edited 14 November 2023 at 7:08PM
    All the T&Cs I've seen charge a penalty equivalent to a number of days interest. I agree it would be clearer if they instead stated the penalty was X% of the sum withdrawn, or £X per £100.
    Where an account actually said there was a forfeit of accrued interest, and the accounting backed that up (i.e. it wasn't credited to your account), then this would be equivalent to the "First Direct RS" scenario.
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