How do you avoid higher rate tax on savings interest

xylophone

Let's suppose that the loan was repaid and the parent simply kept the interest, where would be any illegality?
No, because in this different scenario no interest has been received by the OP through the arrangement so no tax liability has arisen.

Then let's take the case that John Smith is a high earner and subject to tax on savings interest but his mother  Jenny Smith has no income at all.

He comes into a large sum of money which he does not currently need but which he may need in the future. 

 He sets up  to set up a formal witnessed  agreement to lend  Jenny  the money interest free and repayable on demand.

 Jenny is free to do as she wishes with the loan  - she chooses to deposit the money in interest bearing accounts.

The interest would be reported to HMRC - indeed, if high enough,  Jenny Smith would be required to report it herself through self assessment.

Only if the interest earned in the tax year was higher than £18, 570 would any tax be due.

Let us say that the interest was under that amount so that Jenny was not liable for tax.  She KEEPS the interest and repays John the capital only at the end of the year.

If John had earned the interest it would have been taxable.

Legal avoidance or illegal evasion? Or neither because Jenny has the absolute right to do as she wishes with the money?

Aside from the tax angle, John is  of course putting his capital at risk.  Jenny might choose to put all the money on a losing horse at Epsom.

Or spend the lot on designer clothes and holidays and not be able to repay the loan.

Or mother might die and the repayment of the loan tied up in probate at the time John needed it.

 

And so on......

 

xylophone

Questions like "why should HMRC investigate a private family arrangement" don't change it being tax evasion.I

Indeed not, were it deemed tax evasion.

MacPingu1986

xylophone - the difference in your scenario above is that the mother is *keeping* the interest, not paying it/gifting it etc.. (in one form or another) to John.

If the OP wants their parents to earn some extra interest (at the OPs cost of not receiving any interest) then they absolutely could gift, or loan the money to their parents.

What moves the above into tax evasion (settlements/arrangements) territory is a final step where the earned income is transferred to the OP and not declared on the OPs tax return and the associated tax paid.

MeteredOut

MacPingu1986 said:

xylophone - the difference in your scenario above is that the mother is *keeping* the interest, not paying it/gifting it etc.. (in one form or another) to John.

If the OP wants their parents to earn some extra interest (at the OPs cost of not receiving any interest) then they absolutely could gift, or loan the money to their parents.

What moves the above into tax evasion (settlements/arrangements) territory is a final step where the earned income is transferred to the OP and not declared on the OPs tax return and the associated tax paid.

Gets into really murky territory if the parents then gift an amount, roughly equivalent to the interest they earned, some months or years later. I wonder how much later it would have to be for HMRC to determine the transfers were related. Or, what if the parents waited one year and then started transferring an amount back monthly, but an increased amount, taking into account the interest earned on the original interest.

I guess HMRC hope/assume people will comply with the spirit of the law and hopefully get lucky and catch those that do otherwise.

xylophone

Gets into really murky territory if the parents then gift an amount, roughly equivalent to the interest they earned, some months or years later.

Indeed - i mentioned this scenario in a previous post.

MacPingu1986

It's not murky, re that final step if we're talking months up to a couple of years, HMRC will almost certainly still view this as a clear arrangement to evade tax. If a *long* period of time has passed and the gift was part of wider gifts given by the parents that *might* be enough to de-link. It all comes down to intentions at the time - at the time the money was loaned to the parents was it *truly* for them to use it as they see fit and the fact they invested it and gifted back some investment proceeds X years later an unexpected surprise?

(and if the latter can you convince HRMC of this?)

All of this is a bit academic because this whole thread isn't about how to help ones parents out by loaning/gifting them money to create an investment income for them in retirement (that you unexpectedly inherit).

The question posed is can you utilize a non-spouses personal allowance to reduce your tax bill on bank interest that you beneficially own. For that the answer is "No"- it should be declared on your tax return.

MeteredOut

MacPingu1986 said:

It's not murky, re that final step if we're talking months up to a couple of years, HMRC will almost certainly still view this as a clear arrangement to evade tax. If a *long* period of time has passed and the gift was part of wider gifts given by the parents that *might* be enough to de-link. It all comes down to intentions at the time - at the time the money was loaned to the parents was it *truly* for them to use it as they see fit and the fact they invested it and gifted back some investment proceeds X years later an unexpected surprise?

(and if the latter can you convince HRMC of this?)

All of this is a bit academic because this whole thread isn't about how to help ones parents out by loaning/gifting them money to create an investment income for them in retirement (that you unexpectedly inherit).

The question posed is can you utilize a non-spouses personal allowance to reduce your tax bill on bank interest that you beneficially own. For that the answer is "No"- it should be declared on your tax return.

It's murky because intentions cannot be proven.

But, the "looks like a duck, quacks like a duck" test would fail in the OP did try to "loan" the monies to their parent.

GrubbyGirl_2

Sorry I haven't read all the responses but be mindful of the fact they may require care in the future.  You state they envisage living well beyond needing to pay inheritance tax, well we all envisage living a long life but we simply don't know that and you need to be mindful that 1 in 2 people will get cancer at some point in their life.  Whilst they may live to a good age they are more likely to to need care in the future following an illness or accident.  Social services will look into their finances and any money in their name will be considered to be theirs, which it is.  If you transfer the money out they will spot it and they will consider it to be deliberate depletion of their resources and will insist the money is returned and they will go legal to make that happen (trust me I used to work in this area).

For the sake of paying 40% instead of 20% tax that is a huge risk to take, and it could well happen.  Personally I would transfer £20k a year into an ISA and make sure the rest of your savings are in the best paying savings accounts you can get and suck up the tax

wmb194

Low coupon gilts...

saverspavers61

There seems to be a lot of interest in my scenario. Thanks for all the replies. 

I wonder if there’s a few here being taxed on savings who also have parent not utilising their personal allowance

Regarding the comments around trying to time the housing market, I can understand why that might be seen as a fools errand. I’m in a fairly unique set of circumstances as my house was sold at a 70% premium compared to what I originally paid for it (so very much top of the market to the point I could have recently bought an identical house on the same street for £60k less than I sold for).

Additionally, when I said I was renting I’m actually staying with my parents currently and I’m paying towards some of the household expenses. So, all in all, the risk of me losing out is highly unlikely.

There’s a very mixed set of opinions on this one. I’d rather put “detection” by HMRC to one side. For as much as any transaction may never reach them, I’m solely focused on whether the plan is legal.

A few have referenced it being a “tax avoidance arrangement”. Isn’t that the whole point of tax avoidance? That you’re utilising allowances, relationships, transactions etc. to reduce tax owed to HMRC?

My plan after this is to meet again with an IFA and specifically raise the terms “gift with reservation” and “settlements” legislation.

Both of these terms are entirely new to me and Google clearly failed me when searching all number of permutations related to transfer of funds between family to avoid income tax.

Again, replies have been excellent, so thank you.