Tax on interest not received because of early closure penalty

boingy

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.

eskbanker

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.

Your choice, but few would recommend knowingly making false declarations to government agencies, regardless of flimsy rationalisations....

ColdIron

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

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

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 I agree it would be clearer if they instead stated the penalty was X% of the sum withdrawn, or £X per £100.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.

talexuser

My point was one of natural justice. To take the above example for simplicity, you start with 10 grand get 500 in interest you are taxed on, but only actually get 10250 back because of the penalty. Yes the capital may have been in the small print, but not in the headline penalty description that virtually 100% of people would never have realised the consequenses. Yes, it's buyer beware but someimes the law is an !!!!!! that just does not make common sense, and paying tax on income you never had is just that..

boingy

eskbanker said:

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.

Your choice, but few would recommend knowingly making false declarations to government agencies, regardless of flimsy rationalisations....

It's all part of the game. Accountants all over the land routinely test the boundaries and usually get away with it. If HMRC disagree with your self-assessment they point out the errors and you pay the difference. Despite what they like you to think there is no penalty or fine or jail sentence at that point. That only happens if you continue to argue or delay making the extra payment. The truth is that they rarely challenge this stuff because they don't have the staff. Mostly they are just happy that you have submitted your self-assessment form on time. 

Olinda99

eskbanker said:

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....

certainly

https://www.aldermore.co.uk/savings-accounts/personal-savings-accounts/cash-isas/fixed-rate-cash-isas/1-year-fixed-rate-cash-isa/?utm_medium=affiliate&utm_campaign=5511&utm_source=Moneyfacts.co.uk Limited&irclickid=xjtyO-1hBxyPUzWxlVyqYxb:UkFVqUyBA2rw2I0&irgwc=1

Aldemore 1yr fixed rate ISA


 

Can I withdraw money?

• Yes, you can withdraw money from this tax year or previous tax years if you need to, subject to a deduction of 90 days' interest. 

eskbanker

Olinda99 said:

eskbanker said:

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....

certainly

https://www.aldermore.co.uk/savings-accounts/personal-savings-accounts/cash-isas/fixed-rate-cash-isas/1-year-fixed-rate-cash-isa/?utm_medium=affiliate&utm_campaign=5511&utm_source=Moneyfacts.co.uk Limited&irclickid=xjtyO-1hBxyPUzWxlVyqYxb:UkFVqUyBA2rw2I0&irgwc=1

Aldemore 1yr fixed rate ISA 

Can I withdraw money?

• Yes, you can withdraw money from this tax year or previous tax years if you need to, subject to a deduction of 90 days' interest. 

Fair enough, but that's an ISA and therefore not within the scope of discussions about accounts on which interest is taxable....

sheramber

Reed_Richards said:

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:

1. You close your account on 31st October.  You pay tax on half a year's worth of interest credited to your account on closure
2. 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.

This seems grossly unfair but if you are taxed on interest when it arises and penalties are not tax deductible then this is what would happen.

In answer to your question, you are still under the misapprehension that there is an "interest penalty" and that you are paid interest and then "you lose half of that as a penalty". Neither is true.

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?

Penny still in the air.  I understand what you are confidently asserting but I'm still finding it hard to believe.  The nearest worked example I could find is here: https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim2440

Example 2
Sam entered into a five year fixed-term 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.

The penalty is not taxable so is ignored for tax purposes.