How do you avoid higher rate tax on savings interest

ColdIron

BoGoF said:

OP would be far better using that capital to mitigate HR tax in the first place. Some of that money could be effectively returning 40% by paying more into pension.

The money is from a house sale. The OP is "waiting for the housing market to cool before once again purchasing a home"

km1500

"To reduce my tax burden, my intention is to transfer all of my funds to my parent who will subsequently earn interest on the funds. At a future date, likely in 18 months, they will transfer all funds and accrued interest back to me.'

you remain the beneficial.owner so you are liable to the tax - just so you know, what you are proposing is tax evasion and your parents would be accessories to tax evasion.

saverspavers61

km1500 said:

"To reduce my tax burden, my intention is to transfer all of my funds to my parent who will subsequently earn interest on the funds. At a future date, likely in 18 months, they will transfer all funds and accrued interest back to me.'

you remain the beneficial.owner so you are liable to the tax - just so you know, what you are proposing is tax evasion and your parents would be accessories to tax evasion.

Are you sure this is correct? HMRC clearly states that there’s no limit to the amount of money you can transfer to a parent. The only tax they become liable for is any income tax due on interest accrued from the amount (which in this case is irrelevant as they will not earn interest beyond their personal allowance) and inheritance tax on the full amount should I myself pass away within 7 years of transferring the amount (but even this would not be applicable as my estate is currently worth less than the £325,000 threshold).

This is exactly the point I want to clarify though so thank you for challenging. I just think for something like this it shouldn’t be subjective, it either is allowable or it isn’t.

As for the risk highlighted by others of “what if” my parent was to pass away within 7 years, bear in mind I do not intend to keep this money with them for this long. At most the money would be returned to me in 18 months.

Let’s assume for a moment that when my parent transfers the funds back to me in 18 months they are fit and well. I assume that given the initial transfer to them would have been as a “gift”, and the transfer back to me was seen as a “gift” then should they then pass away within 7 years then I would be absolutely liable for inheritance tax on the amount.

But how does that work if I already have the funds, therefore it’s not part of probate or the estate executor process?

Middle_of_the_Road

km1500 said:

"To reduce my tax burden, my intention is to transfer all of my funds to my parent who will subsequently earn interest on the funds. At a future date, likely in 18 months, they will transfer all funds and accrued interest back to me.'

you remain the beneficial.owner so you are liable to the tax - just so you know, what you are proposing is tax evasion and your parents would be accessories to tax evasion.

This would likely be the view held by HMRC. Justified in my opinion, although I'm sure it happens, not a good idea for all the reasons laid out above. For your piece of mind you could put 50K into premium bonds and use this and next year's 20K ISA allowances. 

BoGoF

saverspavers61 said:

km1500 said:

"To reduce my tax burden, my intention is to transfer all of my funds to my parent who will subsequently earn interest on the funds. At a future date, likely in 18 months, they will transfer all funds and accrued interest back to me.'

you remain the beneficial.owner so you are liable to the tax - just so you know, what you are proposing is tax evasion and your parents would be accessories to tax evasion.

Are you sure this is correct? HMRC clearly states that there’s no limit to the amount of money you can transfer to a parent. The only tax they become liable for is any income tax due on interest accrued from the amount (which in this case is irrelevant as they will not earn interest beyond their personal allowance) and inheritance tax on the full amount should I myself pass away within 7 years of transferring the amount (but even this would not be applicable as my estate is currently worth less than the £325,000 threshold).

This is exactly the point I want to clarify though so thank you for challenging. I just think for something like this it shouldn’t be subjective, it either is allowable or it isn’t.

As for the risk highlighted by others of “what if” my parent was to pass away within 7 years, bear in mind I do not intend to keep this money with them for this long. At most the money would be returned to me in 18 months.

Let’s assume for a moment that when my parent transfers the funds back to me in 18 months they are fit and well. I assume that given the initial transfer to them would have been as a “gift”, and the transfer back to me was seen as a “gift” then should they then pass away within 7 years then I would be absolutely liable for inheritance tax on the amount.

But how does that work if I already have the funds, therefore it’s not part of probate or the estate executor process?

We're talking about them passing away within the 18 months. If you nees the money in 18 months and they die in month 17 then you will have to wait on probate.

What makes you think the market will have 'cooled'in rhat time?

jimjames

Good points already raised but well worth considering the risks. Unexpected deaths happen all the time so regardless of apparent state of health that could be an issue. Also should they need care in the future the deprivation of capital rules might come into play - one moment they have £250k in their bank account, the next it's gone. I don't think the council will see it as valid to claim "I gave it to them to avoid tax and for them to then give it back"

Is there a reason you've not used pension payments to reduce your tax rate? It might not be viable if you're at the top end of the 40% bracket but maybe a better option than the one proposed.

jimjames

saverspavers61 said:

km1500 said:

"To reduce my tax burden, my intention is to transfer all of my funds to my parent who will subsequently earn interest on the funds. At a future date, likely in 18 months, they will transfer all funds and accrued interest back to me.'

you remain the beneficial.owner so you are liable to the tax - just so you know, what you are proposing is tax evasion and your parents would be accessories to tax evasion.

Are you sure this is correct? HMRC clearly states that there’s no limit to the amount of money you can transfer to a parent.

There is no limit but if the intention is to transfer back again it's a gift with reservation.

lr1277

Some thoughts.

If you don't want to pay tax on the income don't generate an income. There might be savings accounts that pay minimal interest and many current accounts that pay no interest.

You want your parent with the lesser income to look after your money. But they are financially provided for by the other parent. So realistically they have no need of this income. Why go through this hassle?

One more scenario for you. You send the money to the parent. Somebody needs to have POA. Which if not set up yet, can take weeks or months. I know you say your parent is healthy but cognitive/physical impairment can strike at any age and sometimes very quickly.

So the possibilities are:

you want to pay for a house, but the POA is not registered with the bank/building soc so you can't get the money in time.

You can't be made an attorney because it would be suspicious if you transferred money to yourself from your parent's assets as the attorney. I don't know if you have any siblings, but somebody might kick up a fuss. Especially where £250k is involved.

My point of view is to keep in control of my assets, even if I have to pay tax. If you want to relinquish control, that is upto you.

phlebas192

Take a look at investing in UK gilts. These can be very tax efficient with most of the 'interest' actually being capital gains and there is no capital gains tax to pay on UK gilts. Sorry, I can't post links yet, but it you google "How to buy gilts to beat the taxman on your savings" you should find an article about it on This is Money.

eskbanker

lr1277 said:

If you don't want to pay tax on the income don't generate an income. There might be savings accounts that pay minimal interest and many current accounts that pay no interest.

It's not unusual for people to aim to minimise tax rather than to maximise net return, but of course 100% of nothing is rarely better than 60% of something!