Tax on fixed rate bond reinvested

sunflower_5901

I understand the tax liability on interest on fixed rate bonds arises when you can access the interest (regardless of whether the interest is credited to the bond more frequently than just at the end of the fixed term, on maturity).
However, if, on maturity, you opt to reinvest the proceeds of the first fixed rate bond (including interest) into a new fixed rate bond at the end of the term, at what point is the interest on the first bond taxable? - ie would this be only at the end of the second fixed term (when the interest can  actually be accessed), or is the interest on the first fixed rate bond taxable on the date on which the first bond rolls into the second bond?

EthicsGradient

On the date when it rolls into the second one; you're reinvesting proceeds that you had access to.

Hoenir

Makes no difference what you do with the interest earnt. Remains taxable income in the tax year it is credited. 

Dazed_and_C0nfused

sunflower_5901 said:

I understand the tax liability on interest on fixed rate bonds arises when you can access the interest (regardless of whether the interest is credited to the bond more frequently than just at the end of the fixed term, on maturity).
However, if, on maturity, you opt to reinvest the proceeds of the first fixed rate bond (including interest) into a new fixed rate bond at the end of the term, at what point is the interest on the first bond taxable? - ie would this be only at the end of the second fixed term (when the interest can  actually be accessed), or is the interest on the first fixed rate bond taxable on the date on which the first bond rolls into the second bond?

You are overlooking a key part of your own question.

You do have access to it, you are just choosing to put it in a new bond.

Albermarle

I understand the tax liability on interest on fixed rate bonds arises when you can access the interest (regardless of whether the interest is credited to the bond more frequently than just at the end of the fixed term, on maturity).

You understand the HMRC rules correctly. Interest for a fixed term bond should only become potentially taxable when it is available to withdraw.
However when providers report interest to HMRC annually,( as most do)  then HMRC will tax it in that year. Effectively breaking their own rules.
There are numerous threads on the forum about it.

sunflower_5901

That's really interesting.  I apologise that have not seen those threads. 
I had assumed that the red warning comment on the MSE "Top fixed term savings accounts" page was based on fact and not based on an HMRC rule which is not generally applied: 
In connection with the comment "when providers report interest to HMRC annually,( as most do) ...", how does the account holder establish when the provider reports interest to HMRC?  Can it be assumed that if the provider includes interest credited on a fixed rate bond on a tax year end interest certificate that the provider has reported that interest to HMRC?
Thank you.

masonic

The warning comment is based on the law, so it is a fact. HMRC has (eventually) made clear statements that this legal position should always be applied.

Providers are required to report interest credited, whether it is accessible or not, and they do not differentiate between accessible and non-accessible interest that has been credited. What is on your certificate of interest is what they will have reported to HMRC, and this may be a correct or incorrect of the taxable interest arising, depending on the nature of the account. HMRC is therefore forced to assume all of this interest is accessible in the absence of any other information. Who knows what would happen if it comes to light that some of it wasn't and the taxpayer had underpaid as a result. It's unlikely to happen, but possible.

Those who submit a tax return can do so in line with the correct practices, but it is a problem for those who do not. The problem can be avoided by not selecting an account that credits inaccessible interest. There are many options that allow interest to be paid away, and an increasing number that pay all of the interest at maturity. Either approach avoids ambiguity in the bank's reporting, and you can select the option that is best for your situation.

Albermarle

Those who submit a tax return can do so in line with the correct practices, but it is a problem for those who do not.

It is only a problem for those who do not submit a tax return, if they prefer the interest to be taxed on maturity.
It could well suit many that the interest is taxed annually, rather than at maturity ( like with me !)

masonic

Albermarle said:

Those who submit a tax return can do so in line with the correct practices, but it is a problem for those who do not.

It is only a problem for those who do not submit a tax return, if they prefer the interest to be taxed on maturity.
It could well suit many that the interest is taxed annually, rather than at maturity ( like with me !)

That assumes HMRC will never find out about the underpayment. Personally I don't want that risk, and when there are options available paying just as much interest without the risk, those are the options I'd go for. Even though I do submit a tax return, I'm still inclined to avoid this mess.

Albermarle

masonic said:

Albermarle said:

Those who submit a tax return can do so in line with the correct practices, but it is a problem for those who do not.

It is only a problem for those who do not submit a tax return, if they prefer the interest to be taxed on maturity.
It could well suit many that the interest is taxed annually, rather than at maturity ( like with me !)

That assumes HMRC will never find out about the underpayment. Personally I don't want that risk, and when there are options available paying just as much interest without the risk, those are the options I'd go for. Even though I do submit a tax return, I'm still inclined to avoid this mess.

I understand, but I think it would be a mammoth task for HMRC to unwind the situation, especially as probably >95% of the taxpayers involved would be blissfully unaware of the issue. Also the amounts of extra tax to be gained would probably not be that great.