When should profit (interest) from a saving account be reported to HMRC via Self Assessment

polyphonic99

Hi,

In November 2023 I took out an 18 Month fixed rate bond with Al Rayan bank that was due to mature in May 2025. The profit (its an Ismalic based account, so its profit not interest) is due to be paid to me at maturity in May 2025. To my surprise however,  I have received a Profit Satement from Al Rayan saying that they have internally credited Profit to the account in February 2024, and they were going to do so every 3 months for the 18 month term. There was no mention of this when i took out the bond. There were 2 options: take profit quaretely or receive profit 18 months later at maturity. I chose the latter.

Simple question: do I have to report the interim 3 month profit (that I have been credited with, but won't receive until May 2025) to HMRC for my 2023/24 Self assessment tax return, or can I wait and roll it all up and report it all on my 2025/26 tax return when I the bond matures and I actually receive the profit?

I have already asked Al Rayan, who say they can't give me any tax advise, and have told me to phone up HMRC for the next 6 month.

Thanks for your advise.

polyphonic99

Reply tp JamesRobinson48 above:

Hi, 

Thanks for your feedback. 

I accept your points, but I have to elaborate a little.

This was a partial re-investment of a previous 3 year bond that matured in 2023. 

Up until that time I did receive quarterly profits, because that is what I had wanted and had chosen. 

However for this fixed term deposit I wanted profit on maturity.

Al Rayan did not include the General Savings Terms and Conditions, that you reference in your link above, with the re-investment form (Maturity Form - Fixed Term Deposits).The re-investment form made no mention of it or the conditions you cite.

Instead, Section 4 of the re-investment form referred me to the "Al Rayan – Fixed Term Deposit Account 12,18 ,24 and 36 month Special Conditions"  

Ssection 4 of the reinvestment form (below) states.

Al Rayan – Fixed Term Deposit Account 12,18 ,24 and 36 month Special Conditions

https://www.google.co.uk/url?sa=t&source=web&rct=j&opi=89978449&url=https://www.alrayanbank.co.uk/sites/default/files/media/file-uploads/2021-02/lit-per-ftd-spec-cond.pdf&ved=2ahUKEwjOx9n1y_uGAxU2TkEAHeFzCUkQFnoECB8QAQ&usg=AOvVaw3FWBBvpwaDIraaWUdhBor9 

Point 2.6.2 in the Al Rayan – Fixed Term Deposit Account 12,18 ,24 and 36 month Special Conditions says: "to calculate the deposit profit generated on your deposit amount and to credit your account with the deposit profit quarterly or if you have chosen to receive your deposit profit at the end of the term on the payment date."

Thus I concluded that if I chose to take the profit "at the end of the term on the payment date" the profit would be rolled up and applied at the maturity date in 2025. I don't think that is a misunderstanding of what it states.

After I complained to Al Rayan about the above, there response was that I had first been a customer in 2016 and at that time, they did send me the General Savings Terms and Conditions which you cite.. However, that was 4 products and over 8 years ago, there was no reference to it in the re-investment form and I think it might be resonable to assume that the 2016 version of General Savings Terms and Conditions might have changed since then.

The reason I asked the question here were:

1. to see if, as I suspected, I would indeed now have to declare the Profit from Feb 2024 in my 2023/24 Self Assessment return, which unfortunately now takes me in to the 40% tax bracket for 2023/24, whereas it would have been in the 20% bracket for 2025/26.
   
2. To determine whether I should make a formal complaint to the Financial Services Ombudsman about the ambiguity and ommisions in the Al Rayan reinvestment documentation and process. I will, as I have already made a formal complaint to Al Rayan.
   
3. To alert other users of the forum to the deficienciens of the Al Rayan re-ivestment process, and that choosing the option "profit on maturity" on 12,18 ,24 and 36 month fixed term deposits, does not mean what it says
   

Thanks again for your time and help.

uknick

For tax return purposes most fixed term accounts have to have their profit/interest declared in the tax year in which it is earned, even if it is re-invested back into the product.

The exception to this are very rare products which give no indication of profit/interest earned until the end of its life.  My partner had one of these from Barclays about 15 years ago and has never seen one since.

You can complain to the bank if you want, and they may compensate you in some way out of the goodness of their heart, but at the end of the day as the buyer of such products one is expected to know the rules regarding declarations for tax purposes.

polyphonic99

From UKNICK 

"but at the end of the day as the buyer of such products one is expected to know the rules regarding declarations for tax purposes."

I agree, but that is my entire point. Al Rayan referenced rules laid out in "Al Rayan – Fixed Term Deposit Account 12,18 ,24 and 36 month Special Conditions" , of which section 2.6 stated "to credit your account with the deposit profit quarterly or if you have chosen to receive your deposit profit at the end of the term on the payment date."

Section 4 of the their "Maturity Form - Fixed Term Deposits" says that it is thit form "on which we intend to rely" (their form and the Special Conditions) I therefore also have to rely on what is on their form and special conditions as well. I cannot make assumptions on what different tax interpretation it infers if they have not been laid out in writing and differ from what is laid out in the Special Conditions.

Al Rayan makes no mention of assigning the profit quarterly and thus creating a chargeable event for tax purposes in  the "At Maturity Option" on their "Maturity Form - Fixed Term Deposits" or in the "Special Conditions". Many fixed term products calculate the interest earned daily, but they don't create chargeable events on a daily basis, they specify when the interest will be assigned - monthly, annual or at maturity, and if "at maturity" it can be over multiple tax years. The Hanley Economic Building Society shows you the interest earned since opening the account whenever you want to check, but they don't create chargeable events when you do. They clearly specify that the interest is assigned annually. Al Rayan clearly states that Profit is assigned at maturity, which for mew implied that was the chargeable event for tax purposes.

In my opinion Al Rayan used misleading language to inform customers of how their "At Maturity" fixed term deposit worked, and failed to highlight that its tax treatment would differ from the statement in Section 2.6 of the Special Terms and Conditions. I can only evaluate the rules based on what Al Rayan have stated in their conditions eg to credit the profit on the payment date at maturity. So in my opnion, Al Rayan have mis-sold the product and like any other bank they do not have a heart, let alone any "goodness of heart", so I am quite happy for the FSO to judge my complaint.

Thanks for your comments

uknick

The terms you link to don't cover what happens if you want to get your money back early.  Whilst they say the funds are fixed for the duration there are times when someone will need the money back before maturity albeit with a penalty, for example in the case of death.

If you can get the full set of rules and they say they will not pay out early, even for death you may have a case. 

Bobziz

If the account holder dies there's no way they can get their money back.

uknick

Bobziz said:

If the account holder dies there's no way they can get their money back.

Ok, if we're being pedantic ( ) their estate will want the cash back.

Bobziz

Bobziz said:

If the account holder dies there's no way they can get their money back.

Ok, if we're being pedantic ( ) their estate will want the cash back.

And therefore if probate was required, then funds become available and therefore taxable to the estate at the point at which the account is closed by the executor.

uknick

Bobziz said:

Bobziz said:

If the account holder dies there's no way they can get their money back.

Ok, if we're being pedantic ( ) their estate will want the cash back.

And therefore if probate was required, then funds become available and therefore taxable to the estate at the point at which the account is closed by the executor.

Whilst I agree with your comments, I'm not sure what point you're making.  Are you saying the account will have to go to maturity before the estate's executor can close it?  Or, are you agreeing with me that fixed terms accounts can be closed early in certain circumstances and in which case any tax liability crystalises?

Bobziz

Sorry, yes I'm agreeing with you 

polyphonic99

Hi, a final update on this (thanks MSE for keeping this post live).

polyphonic99 said:

Hi,

In November 2023 I took out an 18 Month fixed rate bond with Al Rayan bank that was due to mature in May 2025. The profit (its an Ismalic based account, so its profit not interest) is due to be paid to me at maturity in May 2025. To my surprise however,  I have received a Profit Satement from Al Rayan saying that they have internally credited Profit to the account in February 2024, and they were going to do so every 3 months for the 18 month term. There was no mention of this when i took out the bond. There were 2 options: take profit quaretely or receive profit 18 months later at maturity. I chose the latter.

Simple question: do I have to report the interim 3 month profit (that I have been credited with, but won't receive until May 2025) to HMRC for my 2023/24 Self assessment tax return, or can I wait and roll it all up and report it all on my 2025/26 tax return when I the bond matures and I actually receive the profit?

I have already asked Al Rayan, who say they can't give me any tax advise, and have told me to phone up HMRC for the next 6 month.

Thanks for your advise.

I complete an annual Self Assessments with HMRC, and have been doing so since SA was introduced in 1997. 

When I submitted my SA Form in December 24, I explained the above scenario to HMRC, in the SA100 form comments box, and an attached Balancing Payments Appeal document. I pointed out that I had not yet received my capital back nor any interest/profit, and that I believed I was not due to pay any tax on the interest/profit until I actually received the interest/profit in the 25/26 tax year, when the bond matured. However, I told them that if my understanding of the situation was incorrect, I would pay the tax due straight away, within the 23/24 Tax year. 

HMRC response was to agree with me, and confirmed that the tax only needs to be reported for the tax year when I receive the profit/ interest. 

Al Rayan's internal accounting is irrelevant, because I receive no benefit until the bond matures in May 2025. Therefore I have to declare it as income for the 25/26 tax year, complete the SA tax return and pay the tax due before 31 January 2027.

To be honest, Al Rayan, and any other bond provider that offers products that pay out at maturity should know this, and be able to tell their customers when asked.

I hope this helps anyone else who find themselves in a similar situation.