How do you avoid higher rate tax on savings interest

badger09

You are not giving £250k to your parent/s. 

You expect your parent/s to return £250k, plus interest, to you. 

Your intention is to use your parent/s Personal Allowance & 0% Savings rate to evade tax. It’s called that for a very good reason. 

I’m surprised any reputable financial advisor would say this is entirely legal and allowable. Though I notice you didn’t say IFA. 

Whether HMRC would find out, & what would happen if they did, I have no idea. 

ColdIron

Have you considered the effect of a one off pension contribution from your earnings as a higher rate taxpayer? You don't say anything about how far you are into HRT, how much of that might be excess income or you pension situation (or whether you pay Scottish tax rates) but here's a thought

If you increased the percentage of your salary that you contribute to your pension to make it, say, £10,000 extra that would be £12,500 gross with basic rate tax relief. HMRC would increase the higher rate threshold by that £12,500 from £50,270 to £62,770 so that's £12,500 you would only pay 20% tax on rather than 40%

Would that soften the blow of the basic/higher rate tax differential on the interest of the £250,000?

All quite legal and avoids a lot of effort plus all of the pitfalls that may be involved with gifting. You'd have £12,500 extra in your pension as well

saverspavers61

badger09 said:

You are not giving £250k to your parent/s. 

You expect your parent/s to return £250k, plus interest, to you. 

Your intention is to use your parent/s Personal Allowance & 0% Savings rate to evade tax. It’s called that for a very good reason. 

I’m surprised any reputable financial advisor would say this is entirely legal and allowable. Though I notice you didn’t say IFA. 

Whether HMRC would find out, & what would happen if they did, I have no idea. 

It was indeed an IFA. Your understanding is entirely correct and the reason I engaged the advice in the first instance. There was no doubt over my intentions. The IFA’s view was that it was common and also entirely allowable. So I assume that means, in their opinion I should add, they bracket it under tax avoidance rather than tax evasion.

saverspavers61

ColdIron said:

Have you considered the effect of a one off pension contribution from your earnings as a higher rate taxpayer? You don't say anything about how far you are into HRT, how much of that might be excess income or you pension situation (or whether you pay Scottish tax rates) but here's a thought

If you increased the percentage of your salary that you contribute to your pension to make it, say, £10,000 extra that would be £12,500 gross with basic rate tax relief. HMRC would increase the higher rate threshold by that £12,500 from £50,270 to £62,770 so that's £12,500 you would only pay 20% tax on rather than 40%

Would that soften the blow of the basic/higher rate tax differential on the interest of the £250,000?

All quite legal and avoids a lot of effort plus all of the pitfalls that may be involved with gifting. You'd have £12,500 extra in your pension as well

Thanks for this. Really good advice. I’m firmly
in higher rate tax band and my current situation would allow for me to make this extra contribution to my pension. I understand how the offset stacks up in your example, however I’m not getting the benefit until retirement.

I guess where I’m headed towards is how much of what I was planning to do “contains pitfalls” versus “is definitely tax evasion”. Pitfalls I can choose to accept the risk on i.e. if money ends up getting stuck/held up or if I’m potentially liable for future inheritance tax. What I can’t live with being in a position where what I’m doing is deemed tax evasion under the current rules.

I think my best bet is to seek advice from an alternate IFA as the advice I’ve received before posting here is not giving me confidence. 

ColdIron

[Deleted User] said:

saverspavers61 said:

I think my best bet is to seek advice from an alternate IFA as the advice I’ve received before posting here is not giving me confidence.

Why not take tax advice from someone who has a professional qualification in tax?

I agree, it's not really their bag which is more investments, financial planning, maybe mortgages etc. It's more up the street of a suitability qualified accountant or tax advisor

poppystar

Definitely a case for getting paid for advice from a professional specialising in the area….but at a saving of £415 a month in this scenario then that’s the first few months savings gone anyway! 

kaysdee

If your parent develops care needs during the time they hold the money, you then get into deprivation of capital territory if they return the money whilst those needs are known and/or that capital being used to self fund care they may have otherwise been entitled to LA contribution/funding if assessed using their existing circumstances. Anything could happen at any time when it comes to health issues.

ColdIron

saverspavers61 said:

ColdIron said:

Have you considered the effect of a one off pension contribution from your earnings as a higher rate taxpayer? You don't say anything about how far you are into HRT, how much of that might be excess income or you pension situation (or whether you pay Scottish tax rates) but here's a thought

If you increased the percentage of your salary that you contribute to your pension to make it, say, £10,000 extra that would be £12,500 gross with basic rate tax relief. HMRC would increase the higher rate threshold by that £12,500 from £50,270 to £62,770 so that's £12,500 you would only pay 20% tax on rather than 40%

Would that soften the blow of the basic/higher rate tax differential on the interest of the £250,000?

All quite legal and avoids a lot of effort plus all of the pitfalls that may be involved with gifting. You'd have £12,500 extra in your pension as well

however I’m not getting the benefit until retirement.

That's not entirely true. If you got 5% interest on £250,000 that'd be £12,500 assuming 12 months

If that were taxed at 40% you'd pay £5,000 and have £7,500 extra to put towards a new house

With the pension contribution you'd only pay £2,500 tax and have £10,000 extra for the new house, a £2,500 improvement now, not in the future

Add that to the extra £2,500 basic rate tax relief in the pension (that you would have to wait for) and you'd be £5,000 better off which is exactly the same amount as the tax that you are wanting to avoid

saverspavers61 said:

As a higher rate tax payer, I’m paying over 40% on the interest which I would like to avoid.

For 18 months just increase the numbers

Simple, clean and definitely not tax evasion. No advisor fees either

boingy

saverspavers61 , I could have predicted how this thread would go from your first post! We've had similar threads in the past.

However, I have a different view. I don't believe it is tax evasion, or a gift with reservation. The parents would have the money in their name, they'd keep the interest and there would be no arrangement or timetable for transferring the money out again. The OP would have no control or even visibility on the money. In tax terms that's a gift. Pure and simple. What happens to the money after that is entirely up to the parents. They could keep it, spend it, or make a gift of some or all of it to someone in the future.

The OP is happy with the numerous risks of handing such a large sum to his parents so no amount of replies saying "but what if..." are going to change that. The OP has also asked an IFA. 

I'd say go for it.

km1500

I can assure you this would be tax evasion

you're not gifting any money to your parents you have no intention of gifting any money to your parents. What you are asking your parents to do is to invest your money to earn your interest and then declare on their tax return that it is their money and their interest and that they would like their relevance allowances set against it

whether you would be found out is of course a different question but you have to factor in the fact that your parents presumably have had zero interest for some years then suddenly will have a huge spike and then go back to zero interest again. There will also be a big transfer of money in and then out again to the account from a connected person.

some computer somewhere may notice!